DRDGOLD Ltd (DRD) 2007 Q2 法說會逐字稿

Good afternoon and welcome to the DRDGOLD second-quarter earnings. (OPERATOR INSTRUCTIONS). Please also note that this conference is being recorded. I would now like to turn the conference over to John Sayers, the CEO of DRDGOLD Limited. Please go ahead, sir.

Thank you. Welcome, everybody, to our teleconference. We will cover the results for the quarter and the six months ended the 31st of December, 2007. The normal disclaimer applies, and I would be grateful if you would all read that and appreciate it.

If we could start with the key features. The sale of Emperor has been completed, and all the liabilities with regard to the Australasian operations have been extinguished as have the losses which totaled a considerable amount of money.

The balance sheet has a healthy cash balance. We are close to ZAR800 million, totally free available cash for any projects we may decide to or have decided to invest in. In the quarter we had a DME imposed (inaudible) stoppage, and we had ERPM breakdowns reducing production. We did issue a notice indicating that we would be 15% down on gold production. We were, in fact, 13% down. The individual costs will be discussed later.

We have reached a two-year wage settlement, and we have developed new measures to manage the December load delivery factor, including, for example, transporting our workers to and from their homes.

If we move to the next slide on safety, we are absolutely concerned about safety, and an analysis of the accidents indicates that 4% only is due to conditions in the mine, 76% of accidents is due to behavior, and 20% of accidents is due to conditions and behavior. As a consequence, we have developed a group-wide behavior based safety initiative which will be ongoing, repetitious and reinforced.

At Blyvooruitzicht they have had their 10th consecutive win in the West Rand Mine Managers' Inter-mine Safety Competition, reportedly during a frequency of 3.136.

In addition, they have won the Minister of Minerals and Energy's Safety Flag Award in the ultradeep gold and platinum category. We believe that is an outstanding safety record.

Operationally due for the quarter, cash operating costs Blyvoor, US$715 an ounce. That was affected by the DME stoppage, and seven shifts were lost due to that. Crown, US$617 an ounce, fundamentally due to lower grades going through the plants awaiting the startup of Top Star. ERPM, $765 an ounce. Breakdowns in plant and machinery hit production there. And in discontinued operations, Tolukuma $1336 an ounce, an obvious reason that it's a discontinued operation.

Margin management. You will see we have preserved our margin over cash operating costs, and you will see more importantly that DRDGOLD in the South African operations have a positive EBITDA for every quarter. A positive EBITDA and a positive cash flow. In essence, a very sound group in the current situation.

I'm going to hand over to Niel now to talk to the mine's specifics and transformation. Thank you.

Thank you, John. Good afternoon, everybody. The first slide that I will be talking to is the (inaudible) slide. The (inaudible) shows what the production take was for the quarter. It also shows what the cash operating margin was. Although production in units is down, we managed to contain costs. Actually costs were fairly flat and actually reducing somewhat, and the margins remain positive.

We hope to be planned for two main incidents in the last quarter. The first was to avoid labor interruptions as a result of our waste negotiations or during waste negotiations. And we also planned ahead to the negative trends that we have been experiencing in the past around December associated with the Christmas break. We did manage both at Blyvooruitzicht and at ERPM to prevent labor unrest and strikes. We also managed to reverse the trend both at Blyvoor and ERPM over the Christmas break with the December month production from under Crown at 10% at Blyvoor, and as you will see on the ERPM slide, up 25% at ERPM. Blyvoor is well on track for the Way Ahead Project to come online. Traffic during May of this year which essentially involves moving away from the volatility of the B5A area into more geologically less complex areas in the far shelf area with grades slightly higher than that, which we see in six shafts from where the bulk of volume has been coming from over the last two years.

At ERPM, ERPM is trending. We're starting to look encouraging, especially the volume trending. Volumes have been very consistent since May through to November of this year. We did, however, first have an interruption in ventilation, which required some work job ventilation shafts, and they subsequently also lost 10 production shifts when a waste motor required servicing and will actually require replacement at ERPM.

Notwithstanding that, as I mentioned earlier, ERPM's production from under Crown was up 25%. On December of 2006, it produced approximately 19,000 tons as opposed to the 14,000 tons of the previous December. The trend in December '07 down from an average of around about 26,000 tons for the preceding five months. Its cash operating margin closed down slightly both as the result of the drop in gold production, but then also because costs went up, we gave better than average increases during the waste negotiations with our (inaudible) operators receiving an increase of up to 30% at management's insistence because in the past they had been quite a bit behind the industry average, and we wanted to catch up on this.

At Crown, volume throughput at Crown remains virtually the same. If at Crown it depleted the loss of its sand dumps, the sand reserves that it had and it is relying currently virtually solely on slime regulation where the volumes are -- where the crates are quite a bit lower, and recovery also slightly down on that which we traditionally manage to expect out of sand reclamation. We filled two sites, which is an exclusively slime site is the main volume feed into Crown. So while volumes remained exactly the same in terms of the kilos were down, and this is more or less the level where it will stay if we can maintain volumes until such time as Top Star comes online.

We are optimistic that we will be able to start lining Top Star in the foreseeable future. The provincial agency for the Heritage Society listed the protection order over Top Star late in the quarter. Being a statutory body, they will decide to reenact that. I believe some correspondence was received at our office earlier this week. I have not seen that correspondence. But to the extent that there are further administrative obstacles standing in our way, these would be dealt to us by a court action, and in the meantime we are going full speed ahead to prepare the site for reclamation. We have placed the necessary orders for the capital equipment necessary for this, and the moment that we receive the license from the Department of Minerals and Energy, it is our intention to forthwith commence with mining operations.

John, you wanted to talk to the balance sheet.

Let's talk briefly to the balance sheet. As you can see, we have a strong balance sheet, a very healthy one. We are not a bank. As such, the best term for our cash is in productive projects which Niel will talk to. And in also looking at the interest of our shareholders, at the current gold price, we have strong cash inflows. We have the ability to fund all of the projects, except the medium-term ones, and even then very low borrowing is required into the future without recourse to debt.

What you're seeing is a very different DRDGOLD, which is free to choose its projects, which Niel will take you through, which have very good returns in the free knowledge that we can fund it.

Thanks, Niel. You can go back to transformation and development.

Thank you, John. Moving on to the slide with the heading Transformation and Development, this tracks the patterns of our efforts to bring about transformation within our labor force and management. The chart has set certain thresholds that we need to achieve. DRD sales has embraced the concept of transformation and development, and on this slide you see both the trends will converge actually as sales, historically disadvantaged South African management moving from 23% up to 25% from July to December, all through our quarter, and women in mining from 6% up to 6.4%.

We have established that, and we have the view that long-term sustainable transformation is basically achieved by developing internal talent, identifying and developing internal talent. We have a nine tier process in terms of which we identify talent, and a lot of resource and time go into our talent pool which will feed our various levels of management.

Moving onto the next slide, reserves, this sits out the movement in reserves from 2006 to 2007 attributable to DRD. Reserves have remained basically the same with a slight downward adjustment mainly because of the exercise by DRDGOLD's (inaudible) partners, Khumo Gold, to take up the balance of their stake. And DRD say they now hold a full 26% of the equity in DRD S.A. in collaboration with an employee trust.

Moving on to the next slide, our resource statement, that too is an indication of the manner in which this resource of the Company has grown over the last year. This to a large extent because of an increase -- a significant increase at ERPM with the DME awarding ERPM (inaudible) both for the ERPM 1 extension and the ERPM 2 extension.

A point that John regularly makes is that for DRD S.A. to double its reserves, it needs to convert 10% of its resources to reserves, hence our focus on organic growth and our investment into growth projects moving our existing footprint.

Moving on to the next slide, current projects, it has been the long-established strategy or long status strategy of DRDGOLD to maintain a healthy balance between its underground assets where we experience the biggest swings and where sensitivity to external factors is the most pronounced, balance those with the healthy portfolio of surface assets and looking at the projects that are ongoing. This reflects the philosophy and the illusion of strategy to maintain that philosophy. The Blyvoor Way Ahead Project, which is an underground project, is aimed at replacing the B5A answers and will have the effect from May onwards of this year, May onwards of accessing larger turns of higher grade ore than that which we find in six shaft, bringing about a mix which favors higher grade areas to slightly more than the median and lower grade areas of six shaft without sacrificing talents and volume capacity.

Crown upstart I have already mentioned that the capital votes for this have been improved and that we're busy preparing the site having placed all of our orders. I also mentioned that the Heritage Society, while it has not fully run out of remedies, has indicated that the protection order is lifted. I had have not had an opportunity to study the correspondence, which we received earlier this week. I have every intention of doing so. And to the extent that the Heritage Society might have another go at this, my personal view is that this would be in the utmost bad faith, and we have every intention of challenging that through the courts. We are not interrupting this process, though, and we will go ahead with site preparation at full speed.

The next project, current project, is the ERGO Phase I project. This is the joint venture that we have with Mintails S.A. Totaled resource is 1.6 million, and this is audited and verified. The typical resource to DRDGOLD is 618,000 ounces, which effectively doubles the reserves or just about doubles ERPM's reserves since this particular resource, the Elsburg Complex is situated on the ERPM footprint. Effectively ERPM would now resemble the model of Blyvoor where there is a steady surface circuit once this comes online, coupled with an underground orebody.

Medium-term projects on the next slide, these are projects where we have not yet proved the project parameters, pending feasibility studies. The ERPM Extension 1 is one of the prospecting permits that have been granted by the Department of Minerals and Energy to ERPM. It is directly adjacent to the existing long wall and the continuation of the orebody that ERPM is currently mining. The feasibility for this particular project will be completed by the end of March 2008, the reason being that the natural movement of mining currently at ERPM is into this particular site.

The Department of Minerals and Energy has given permission that we might overstock the exploration drive into this site on reef, which is effectively an extension of the base length of the ERPM, which does provide us with a measure of additional flexibility.

The ERPM Extension 2, which is further east from the ERPM Extension 1, this is a genuine real exploration asset. Our Board earlier this week authorized capital expenditure of just over ZAR9 million to be spent over the next two years rather from 2008 toward the end of 2010, and the purpose of the expenditure being to do a prefeasibility study and also obtain whatever consent, rights and entitlements are required to build a mine. But we do not envisage taking this particular project much beyond prefeasibility before 2010. Those numbers will also tell us exactly what we could then do with it and where we take it.

ERGO Phase II is the stepup portion of the Mintails JV or the ERGO JV with Mintails, and what this essentially involves is investigating the extent to which the existing ERGO footprint, which essentially is the combined resource of Crown and Mintails, a resource other than the reserves currently forming part of Crown's life of mine and which totals approximately 1.7 billion tons of material, the extent to which this particular resource provides an opportunity for uranium and sulfuric acid extraction. We believe that these dumps do contain uranium. We believe that they do contain sulfuric acid because they are similar in nature of the sites that were treated by AngloGold Ashanti through this very plant, and we are going to get and, in fact, have retained external consultants, reputable external consultants, to provide us with a full bankable feasibility to be completed by the end of 2008 to establish the extent in which we do have a uranium and sulfuric acid business which we can develop as the second phase to the existing ERGO joint venture.

That concludes the summary of the project. I believe that there is a brief video on the ERGO project which should come up on your screen now.

While we are waiting for the video to kick off, I might briefly just mention the headlines of the last slide, mainly why ERGO is different, and then the ERGO project and the video might make a little bit more sense.

The reason why we believe ERGO is different and has a strategic advantage over other surface pretreatment facilities or projects rather is because it already has the five key essentials to establish a business of this nature.

One, it has the resource. Two, it has a plant. Three, it has a deposition facility where it can place its tailings. This one proving almost one of the most difficult to achieve in the current regulatory environment that the mining industry finds itself in in South Africa. Four, it has a network of servitudes and rights of access over which it can establish pipelines and cables with which to connect these resources to the plant and to the tailing facility or the position facility.

ERGO itself now owns roughly 1800 servitudes, which means 1800 properties at least are affected with (inaudible) cables through those same properties. The sheer scale of this and the cost involved in securing this speak for itself. And then finally, it requires lots of water, which ERGO has access to via the pumping capacity of the ERPM. The ERPM pumps roughly 60 million liters of water from old underground workings per day, and this could treat directly into the ERGO circuit as part of its recruitment process.

But the video I believe is accessible on the website and can be viewed at your own convenience. It is approximately three minutes in duration.

John, do you have some concluding remarks?

I think what you're looking at is a very different Company to a few months ago. It is well-funded. It has genuine growth opportunities as you have seen with very positive project returns. It's got a motivated team, highly stable and in a position to fund all of its internal projects and to really access its internal gold, which was purchased at very good prices. I think you are looking at a very stable, good investment opportunity.

Thank you. Are there any questions?

(OPERATOR INSTRUCTIONS). Victor Flores, HSBC.

Listen, unfortunately I have not had a chance to see the video on the ERGO project. I was hoping to get a bit of flavor on how you see that project evolving? And especially with respect to costs, because there seems to be quite a range of costs out there for these tailing projects and just projecting costs sort of towards the lower end of the range. Could you just walk us through how you achieve those costs and as I said how you see this project evolving?

Well, the projects, Victor, I will let Niel answer some, but the project is due online at the end of October this year. And a lot of the costing is due to the fact that the plant exists already and is simply being renovated to the highest standards I might add when you have see the video.

Niel, do you want to add to that?

Yes, I think we have a reasonable degree of comfort and confidence in the numbers which we use to construct the model going forward. And there is nothing to suggest that the reclamation costs here would be inconsistent with the costs typically that we find at Crown. Because it is a circuit that is very similar in nature, the same technology. The same people would be managing it, and the same type of assets would be access to mine it.

So you're pretty comfortable you can get those lower costs?

Yes, we are.

Excellent. Thank you so much.

(OPERATOR INSTRUCTIONS). [Charlotte Matthews], Business Day.

What comes for Crown after Top Star is depleted? Are you looking for other opportunities to reprocess dumps there?

After Top Star is depleted, we will be into the fully operational JV with Mintails, which has 1.7 million tons of material to process. We will give Crown gold recoveries the life of mine of approximately 20 years.

So the Mintails essentially goes into Crown?

It is a JV between ourselves and Mintails.

Okay.

[Michael Kosmana], private investor.

I'm wondering are you doing anything to splint the power shortages coming from Eskom, and what are the plans for bringing on any additional generating capacity?

It falls into two, well three parts really. The first one is we had already reduced our consumption by 10% or more. So as such, at 90% power we are not affected on production at all.

In addition, we are assisted by our surface circuit, which uses materially less power than the underground circuits. Our main concern was safety. We have negotiated a four hour warning of any possible potential cuts from Eskom to get our people out from the (inaudible). And the one investment we are looking is a mobile generator, which will have enough power to operate to bring our people out of the mine should Eskom fail completely without notice. But at the moment, Eskom power issues are not affecting DRDGOLD at all.

Mr. Sayers, at the present time there are no additional questions. Do you have any closing remarks you would like to make?

No, I think we have said it all. We have had a good year, and thank you very much for your cooperation on our side and this side of the water.

Very good. I appreciate it. Thank you very much, sir. That concludes today's teleconference. Thank you very much, and you may now disconnect your phonelines.