DRDGOLD Ltd (DRD) 2009 Q1 法說會逐字稿

Good afternoon, everybody. On behalf of our CEO, John Sayers, Craig Barnes, our CFO, and myself, welcome to you all and thank you very much for taking the time to attend our quarterly results presentation.

While you read the disclaimer, what we will try and share with you today, over and above our results, are just some of the new dynamics I think that we are faced with, both in our Company and also in our country insofar as managing ultra deep mines in particular are concerned, how that affects our strategic thinking and how that will guide us going forward in our decision making on the expenditure of capital and the allocation of resources.

The key features of this quarter are set out; our headline earnings are still pretty robust. We are very pleased to announce that we acquired an additional 15% interest in the Elsburg Gold JV. That project consists of two distinct streams; there's the short term or near term gold stream, which we refer to as the Elsburg Gold JV. And then of course there's the longer term uranium and asset stream which, at this stage, are still very much in its conceptual phase. And it's in the Gold JV that we acquired 15% from Mintails, our JV partner, for a purchase consideration of ZAR100 million, all of which was reinvested back into the venture. Then we have a conditional option to acquire a further 11% at the end of this year.

Commissioning of the first CIL circuit at the ERGO plant is on track; we're ready to hit the button there and we've in fact started with some test work.

The commission of the Top Star dump is on track, also to begin in the December quarter; in fact we're probably about two weeks away from starting production. All the civils are just about in place, all the regulatory issues have been dealt with. We had some additional discussions with the surrounding communities because we hadn't spoken to them for about two years and we just wanted to pick up on those relationships and make sure that they're happy with progress and the measures that we have in place on the environmental side. And we're pretty much ready to go.

And then of course at Blyvoor, the Way Ahead Project, that we've been talking about on a regular basis, that is also on track.

Our operational review for the quarter is the next slide. Our costs per production unit per ounce fluctuated between $554 per ounce at Crown through to $1,003 per ounce at ERPM. I think we'll deal with the -- some of the challenges that we faced at these operations in greater detail when I go through the production volumes at Blyvoor with 32,000 ounces, Crown 23,000 ounces, ERPM down to just under 15,000 ounces with a total of 70,000 ounces. And this is pretty consistent with what we did last quarter; the mix changed slightly with more production from surface and less production from underground.

The biggest impact of underground reduction was at Blyvoor as a result of two stoppages. After just on nine months without any fatal accidents, Blyvoor had two fatalities during the course of the quarter, both relating to seismic events, and we lost a total of 15 production days as a direct consequence of those two events.

ERPM, we'll talk in greater detail; I'll show you some slides on the issues that we are faced with at the South West Vertical pump but we are looking at a possibility there of an indefinite suspension of drilling and blasting.

Ergo, as I said earlier, after further CapEx in the quarter of ZAR36.2 million was ZAR36.2 million, we're on track to get going.

Craig Barnes will take you through the next two slides on the financial performance.

Thank you, Niel. Good afternoon, ladies and gentlemen. This quarter's results were mainly impacted by the lower gold price achieved during the quarter; increased pressure on costs that we're experiencing, and I think everybody in the industry is experiencing. The safety related stoppages at Blyvoor where we lost round about 120 kilos; and also the impairment that we've now raised -- a further impairment for ERPM's underground assets.

Our revenue decreased by 4% to ZAR476.7 million, and that is in line with the 4% decrease in the rand gold price for the quarter. Our cash operating costs increased by 9%; as I said, mainly as the result of the increased cost pressures on the consumables that we use. And also due to an Eskom price increase of round about 20% and the higher winter tariffs that we experienced during the quarter.

Our operating profit decreased by 55% to ZAR57.2 million for the quarter. Included in the investment income number of ZAR32.9 million is the interest we receive on our cash; in fact it's made up mainly of interest. In the taxation number of ZAR14.3 million, that is mainly Crown, we paid tax there of ZAR11.9 million; and it also includes STC on the dividend which we declared of ZAR3.7 million. That leaves us with a loss for the quarter of ZAR8.8 million compared to the ZAR44.5 million that we achieved in the previous quarter. And, as I said, mainly as a result of the issues that I mentioned previously, including impairment of ERPM.

On the balance sheet, the main number that I wanted to highlight there is the cash balance. We're still sitting with a cash balance in excess of ZAR800 million and that is in spite of the fact that we've been spending a significant amount of money on getting our projects -- well, Ergo specifically, up and running.

So that leaves us in quite a good position, given the state of the current markets and the credit crisis. It means that we don't have to go back to the market; we're not forced to go and raise capital in order to fund our short term projects. And our current ratio's still healthy at above -- at about 3. So as I said, still a strong balance sheet and that leaves us in a great position for what we want to achieve with our projects going forward.

I'll hand you back over to Niel just to go through the operations.

Thank you, Craig. Dealing first with Blyvoor, I mentioned to you earlier that we lost 15 production days. Blyvoor is the deep level underground mine in South Africa with probably the best safety record. And I think it lived up to its reputation for the greater part of the year, up until these two events. Both of these events were as a result of circumstances which the controls and the focus to detail which management, in collaboration with labor, apply on a consistent basis could not prevent.

So they are very much unfortunate; one of them certainly preventable, an employee who, for some reason, decided not to make use of safety equipment that's made available. And the other one as a result of forces of nature where we lost a colleague in a brand new development and in a seismic event. Ironically the crew was moved into that development on that very same day away from an area which we believed had become unsafe and unstable after a presentation by our seismologists and rock engineers the week before.

I think we probably need to say a little bit about the phenomena of stoppages and how it impacts on the mines. I think conceptually one cannot really find fault with the DME's approach on suspending operations until such time as the DME had been given absolute certainty that circumstances which have given rise to the event had been adequately addressed. However, it does introduce a new dynamic into deep level underground mining in South Africa. It does impact on one's strategic thinking and it also impacts on, I believe, how one manages risk and spreads the risk through the portfolio of assets that is under one's control. Maybe talk a little bit more about that at the end of the presentation.

You would have seen in previous -- the previous quarter's presentation, the black line, at Blyvoor it remained fairly stable. This time it's not the case; we are feeling cost pressures in real terms, not just unit costs. Unit costs is an indication really of the number of units produced, an efficiency measure which -- whereas this one here is an indicator of the actual amount spent in order to produce that quantity of ounces. And you can see that it's actually -- sorry that quantity of ounces, you can see that it's actually gone up in real terms.

We saw during the quarter increases in certain steel products in excess of 30%. Obviously there were the power hikes coupled with the winter rates and this is probably a short term reality, or a near term reality, that we are going to have to deal with, especially now with what seems to be a mini collapse in our currency. WAP production has started in the quarter; it's a project that was two years in the making and that has now taken off.

Blyvoor as a mine, if it's not interfered with, achieves goal. The amount of capital that's been spent on this mine has positioned it in such a way that they do achieve the tonnages on a daily basis; they get very close to grade on a daily basis if they're not interfered with. So it is a mine that presents us with some pretty spectacular swings on a month-to-month basis.

When you have a month like we had now, September, with several days of production lost, it's a barely breakeven mine. But one month later or one month earlier, if there's no interruption, it's not uncommon to see a ZAR20 million, ZAR25 million cash profit coming out of Blyvoor. I think that's probably one of the dynamics that we incorporate in our thinking which we have to take into account in how we position our assets.

But we are pretty happy with Blyvoor as an operating division. Whilst it does face a number of challenges in this new environment, it is sensitive to volume and also to cost; it is certainly making a contribution more often than not.

ERPM, at ERPM there's very little good news at this stage. We had the Section 189 process, which was the reorganization of the labor force and the reduction of volume during the quarter. I don't think the process went quite as smoothly as we had hoped. And many of the recovery issues that we faced with -- were faced with at ERPM in the past, continued.

We also had an event earlier, or late in the quarter, late last month, on September 19, when ERPM had two fatalities, which occurred in its pumping shaft. It's a shaft that is dedicated entirely to the pumping of underground water, South West Vertical. We pulled our people from that shaft after approximately 48 proto team shifts to establish if we could make the area safe and came to the conclusion that we could not. And that has set in motion a whole series of events, and it's within the context of that, that we believe underground drilling and blasting might have to be indefinitely suspended.

In addition to that, performance here is not particularly encouraging and the results that we are getting from Turgis, who is doing a feasibility study for us on Sallies One, is also not particularly encouraging. We have reason to believe that the decline layout, which we thought would be the ideal layout to access that ore body, is not supported by the geology in the area adjacent to the current FEV basin. And that entire project might have to be relooked as well.

So there will probably be some activity around ERPM in its immediate future within the next few weeks. We are engaging labor; we are engaging the Department of Minerals and Energy surrounding mines, Central Rand Gold in particular; and also the Department of Water Affairs and Forestry on an ongoing basis with regards ERPM and finding, or studying, alternatives for ERPM and its continued existence underground.

But here's the graph that I was talking about and that gives a better idea of exactly what it is that occurred at ERPM and how that impacts on production currently. This shaft here is where pumping takes place, South West Vertical Shaft. Obviously by not pumping there, there's an immediate impact on the water levels in the central basin; near the stratus Rose Deep, which forms part of the central basin. In that, that water level is not contained below the uncontrolled decant point, which is just about there, you could see the distances and the heights set out on the graph. If this continues for a few more days, you would in fact have an uncontrolled decant into the 24 level pump station. That has an impact on whatever lies to the west of this pumping station.

How it impacts on ERPM production at this point in time briefly is as follows. This is the area where ERPM is currently producing, it puts the better part of 2,000 -- 2 million liters, 2,000 tons of ice down the working area on a daily basis in order to bring down temperatures within legal limits. That water, or the water from that ice, is pumped through a series of plugs into this basin here. Now it's being pumped against a considerable head as we speak. The water that is pumped through this plug does not fall into an empty cavity; it is in fact pumped against the head and it needs to displace water that is built up in this basin here.

Now because these pumps are no longer running, the water level here is rising at the same rate that we are putting water through the plugs and also from some other holdings and points of ingress into this basin. The long and the short really is that this is about as much margin as we have. These pumps, nine stage pumps, can pump against a head of 720 meters. The water height is, as we speak, 722 meters; this is as at October 25. We've ordered some 10 stage pumps, just to buy ourselves some more time in order to consult responsibly with all interested and affected parties, and that will buy us about another 100 meters, I believe. But this is the rate of rise on a daily basis.

Central Rand Gold, they've approached us, they believe that they might have an engineering solution for that; they're onsite at the moment. We're allowing this to happen but on condition that there's a complete transfer of risk and we'll find out from them during the next few days whether there is a solution for that.

But I think what you're seeing here, coupled with the performance of ERPM over the last quarter, coupled with the messages that we're getting from Turgis, or outcomes that we're getting from Turgis in their feasibility report, pretty much sum up where ERPM currently is at. And, to a large extent, well I think, not just to a large extent but -- really drives us to the point where we have to start seriously deliberating about the future of ERPM going forward.

At Crown, managed to up its production somewhat with better recoveries. Crown also, for the first time, saw a slight increase in its actual costs in real terms. But then of course also because of the increase in production you're seeing an increase in revenues. And that to a large extent offset the lower production that we saw from the underground operations.

Preparations to mine Top Star, just about complete, we'll be ready to throw that switch in a week or two. We are experiencing some challenges on our tailings deposition site. It's not entirely unexpected, because we've been depositing mostly slimes on those tailings facilities for the last two years, waiting for Top Star to be approved. That has affected the extent and the manner in which we could install buttressing, also the construction of our day walls on those tailings, because you use the coarser material for that.

And at the Homestead tailings dam, we are not depositing anything at this point in time. We're installing some additional buttressing and waiting for the moisture content in the tailings to drop. This is in collaboration or in consultation with our contractor, Fraser Alexander Tailings, they give us advice.

We'd looked forward to higher production coming out of Crown once Top Star kicked in. We won't see much higher production, but we won't see a drop in production because the higher grades coming out of Top Star obviously will help offset the drop in volume.

Okay, here are some photographs and also a bit of information on the Top Star project. We've I think taken you through most of those. We're very exited about the expected return on this project. Gold price this morning was ZAR270,000-odd, and this is what the MPV looks like at ZAR220,000. It's got a very, very robust return, and one that will play an important role in our company over the next 20 months.

At Ergo, Phase 1, we're ready to go. We have a short video at the end of the presentation that will give you a better idea of what we've done there. But I think this is a very impressive piece of engineering that you'll witness here. Highest quality and very well executed on time. We had some adjustments to budget, mostly because of increases in the steel price, but it's a very, very exciting project. And earning an additional 15% of this project is something that we are very happy about.

Right, the three focus areas over the next 12 months or so. I think we spoke in past presentations about how we believe the production trains coming out of Crown, Blyvoor, and also the anticipated returns at Ergo, would enable us to investigate to the fullest the potential of ERPM, and also spend some money -- let's call it an option fee -- on the ore body, sustaining the ore body.

I think, however, with a new dynamic of interruptions in underground production, because of circumstances that we can't really control, and the inevitability of at least a week standing time, that balance may have slightly shifted. And where we could to a large extent rely on steady production from underground and surface Blyvoor and Crown, that is by no stretch of the imagination a given going forward.

So, the extent to which one could really justify the amount of money that we had set aside, budgeted for, and had resolved ourselves to spend in order to sustain ore bodies for the simple sake of optionality, I think that becomes a harder argument to make. And it's obviously something we need to take to our unions, to our labor force when we talk to them about the future of ERPM. But I think that has brought a new dimension into how we manage the risk in our operation.

Cost control, equally, has become very important. We've always been very focused on costs, but I think controlling those costs in this volatile environment has got to deserve some additional attention. And also, we want to be spending money where we believe we could make money in the most appropriate way.

Margin management, the balance between surface and underground, how much, how big the losses are that we are willing to absorb, that we could be required to absorb in order to maintain optionality associated with large ore bodies? All of these things come into additional focus, and we have to consider those in deciding how we apply our resources and how we spend our cash.

The projects that we have lined up for our Company have been tailored in such a way that we can cover them with the existing cash reserves that we have, supplemented by cash flows from our operations. We need to ensure going forward that the cash flows out of operations remain positive, and we will also limit ourselves to projects that fall within that category. The market's not a particularly friendly place at this point in time, and the last thing that one would want to do now is to go to the market and try and raise capital for projects, or capital to sustain operations.

So, I think it's very well summarized in John's letter to shareholders, the no heroics part, no heroics for the next 12 months. We are going to be very conservative in looking at risk, looking at cost controls, and take an almost clinical view when it comes to margin management and how we spend our money.

Right the next -- the next bit of the [Ergo video].

(video playing)

Thank you very much. That concludes our presentation. If there are any questions we'd be happy to take them.

There is a microphone that will be handed to you just now.

Niel, Brendan Ryan from Finweek. Indefinite suspension of blasting and drilling to me equals closure, but I don't hear you saying the closure word. So could you elaborate on that?

And then secondly on the pumping, how many days do you have before you lose that pump station on 24 level, after which I guess it's [ovis kidovis], is that right?

Yes, I don't think there's more than about four days left before the valves are no longer accessible. The valves are the plus-in to the central basin. And a week or two after that I think the pumping station's underwater. Kevin Kruger is here and he's got the exact times here. Kevin if you --?

That's correct, we've got four days until replacement of the pump chamber (technical difficulty) extensions to the pump itself. And a further approximately four days between (inaudible).

Yes. So on your first question then, does that answer your question on the pumping Brendan?

And if you lose that pump station, that's it?

Yes. I don't think we'd be able to get back into that pump -- into that chamber -- [when] we'd be able to establish pumping capacity higher up in the shaft. Our preference though, and we're working on this, because there's about a nine month construction period that would be involved in that, is about 300 meters from surface in the central shaft there's an adequate facility for a water pumping circuit, for a pumping chamber. And it's something that we're going to have to do I believe because you don't want the mine water to contaminate underground water and you also don't want the water to surface.

So whilst from an operational perspective the pumping chamber might be gone, or we might lose it within the next few days, from an environmental perspective, we will make sure that adequate alternative measures are implemented in time before the water does in fact reach surface or reaches the natural underground aquifers.

And, as I say, that will probably take about nine months to implement. So we've got about -- roughly 12 months within which to plan that and see if it's the best alternative. And then also it depends on what our neighbors decide to do, they may decide to look at intercepting the water further west and that might also then present a solution insofar as the surfacing of water is concerned. But we're closely monitoring that.

On your first question you're not hearing the world closure. Yes we're not using the word closure. Although this pumping chamber might be lost, there are ways and means or there should be ways and means of establishing alternative pumping infrastructure at Far East Vertical Shaft. Our initial numbers suggest that, that will take at least two years to install and ZAR80 million to -- that will be the cost associated with that. And obviously that could be one of the issues that we would have to consider and also share with the unions in discussing with them the future of this mine over the next month.

Thanks.

Certainly.

Steve Shepherd, JP Morgan. Some of the junior gold mining asset prices out there at the moment are very low indeed, two names spring to mind immediately, one of them would be Commodity Gold and the other one might be Aflease Gold. Could you just share, you're obviously -- well it's not obvious, but to me it seems clear that you're recognizing a very high level of risk in deep level underground mining. Could you possibly share some thoughts with us on whether you would foresee the future of DRD as a consolidator perhaps or not?

I think insofar as ultra deep level mining is concerned we probably own all the assets that we want to own because you do want to manage the size of your underground footprint, that's where you have your volatilities, that's where you have your high power consumption, that's where you have your labor intensity. So we're definitely not looking for -- to acquire other ultra deep level mines. So as a commodity, I think the portfolio of assets that they have under their control is not something that we would look at, I don't think that's attractive from that perspective.

Aflease I don't quite know how far they are with their projects, I don't know how much baggage they're carrying with them because I know that they have one asset which appears to be a pretty good asset, the one out in the Far East Rand. It's not a very deep asset and I think the engineering there is of a good quality and I think the ore body is also at a proven ore body. But how much exists around that asset I don't quite know and it's not something that we will pursuing as part of an existing strategy. But yes I think if every there was corporate activity in respect of underground mines, that would be the type of asset that we may look at.

For the time being though we're spending our money on the areas of focus that form part of our more immediate strategy, our strategic focus, and that's really the surface operations. We may have to fork out another ZAR75 million come December in order to acquire an additional 11% of Ergo or the Elsburg Gold JV. And then of course we'll also have to fund the feasibility studies around uranium and asset going forward. That's something that will require significant capital rising in a few years from now. So if and when one does go the market and say, give us the money to build these plants, you obviously want to make sure that you have covered all your bases and that you've done a very good feasibility study. So we'll be spending some money on the feasibility studies going forward as well.

Thank you Niel, could you just update us perhaps on the next 12 months CapEx as you see the plans at the moment?

Craig, you've got the CapEx schedule going forward is it not?

Okay, in a minute.

Obviously we've slowed down CapEx a little bit at the RPM now; Blyvoor is on track, it will stick to its existing CapEx program. We've had to provide for an additional ZAR100 million at Ergo with the acquisition and then potentially the -- another ZAR75 million.

Okay. Most of our CapEx focus is obviously going to be on Ergo. We've spent to date around ZAR176 million on Ergo, that's our 50% of the costs. Still to go on the project to finalize it is around about ZAR97.9 million for the year and then -- and that's our 50% portion. And as you know we acquired the 15% for ZAR100 million, we've spent to date ZAR26 million of that ZAR100 million, so there's still the remaining ZAR75 million out on that. And then the additional 11%, as Niel said, would cost us ZAR75 million.

With regard to the other operations, Blyvoor, Crown and ERPM, I think the CapEx is pretty much in line with what we've been spending in the previous year, forecast for June 2009.

Okay, thank you.

Any other questions?

Niel, on Blyvoor, I've been listening to you talk about risk management. Are you saying that if the kind of thing that you showed us now within a loss of 15 days, those kind of stoppages, are you saying Blyvoor could get shut down or operations cut back going forward?

No. No, what I'm saying is that you could really only afford, in the portfolio of assets that we have, you could only really afford one asset to misfire at any given point in time. So our priority obviously at this stage is Blyvoor because that's where we're getting the consistencies in numbers. And that ERPM is the mine where we're looking at alternatives going forward.

So Blyvoor is secure for the time being, it's ERPM that's on the block?

Yes. Blyvoor's production is pretty steady and in the nine months prior to these two unfortunate events we had no cause to -- cause of concern so far as Blyvoor is concerned.

Thank you.

Alright, thank you. Matthew.

Matthew Hill from [Financial Mill]. Niel, for your decision on ERPM how much of a bearing will the DME's recent trend of slapping these Section 54s every time there's an accident have? How big a role will that play in your decision?

Matthew I think that's just one of many elements that one would have to consider or factors that one would have to consider. A mine with a high yield that has some surge capacity or that could recover one month's losses in the next month or in the next three months, obviously there the possibility of interruptions of this sort would have lesser of an impact than one which has been consistently losing money.

But I think I need to make this clear, what you're seeing happening at ERPM is not because of a Section 54, what you're seeing happening at ERPM is because we've come to the conclusion that to continue to deploy people in that particular shaft has become unsafe because we do not have an adequate understanding of the risk associated with gas emissions in that particular shaft, that is the reason. And whilst this may have set in motion a series of events, it is by no means the reason why we are asking questions about ERPM. There are a multitude of other factors at ERPM also that we need to consider.

Alright, if that concludes the questions, is there one more, thank you.

Hi Niel, sorry it's Allan Seccombe from miningmx. What life do you have left in your surface operations at ERPM? And would that form a factor in your decision for the future of that operation?

Yes, look Elsburg dump, which is the core asset going into the Elsburg JV over the next 12 years belongs to ERPM and Cason dump also belongs to ERPM. Cason has a life of about another six to seven years and Elsburg has a life of 12 years. So ERPM as a mining entity is very important to us. How we deal with the assets and what we do with the assets and the decisions that we make on the types of assets that we have there, underground and surface. And obviously there we would have to look into what the future holds for us. But ERPM as an entity is -- it's going to be around for a while.

Right anything else from anybody? Well once again thank you very much for taking the time and the trouble to attend our results presentation meeting. We have snacks outside, our operational people are here as well if you have any questions or anything that you want cleared up, feel free to engage them. Thank you very much.