DRDGOLD Ltd (DRD) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the DRDGOLD quarterly conference call. All participants are now in listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS.) I would now like to hand the conference over to Niel Pretorius. Please go ahead, sir.

Thank you very much. Good afternoon, everybody, and thank you for taking the trouble to dial in to our call. We have the presentation on our website, and every time that we go to the next slide I will just point that out.

While you take the opportunity to read through our disclaimer, this would be the first result presentation that we have after suspending operations at the RPM, and also after having commenced with mining at Top Star and Ergo. So, I will be focusing a little bit more on that and also on what we can expect from those in the near term.

Going to the first -- the third slide, rather, on how we fared. We're very pleased to announce that we've had another fatality-free quarter. And that Blyvooruitzicht gold mine are remaining under current operation. That is now standing at approximately 720,000 (inaudible). We saw a 2% drop in gold production, but I will talk a little bit about that when we talk about the takeover of Ergo and the accounting of gold produced during the past quarter in Ergo.

Cash operating costs were 5% lower. A lot of that has to do with the fact that ERPM's costs were significantly lower this quarter. We also did see a 30% -- a 38% increase in operating profit associated with pretty steady production and a significant increase in gold price, a 19% increase in gold price.

We are pleased at the production buildup at Ergo, the Way Ahead project Blyvoor and Top Star continues at pace. Particularly Top Star, we're very pleased with the results that we're getting.

Going to the next slide, slide number four, gold production per quarter and quarter-on-quarter. I did speak to many of you earlier about what we thought were indications of new trends and what was simply events in the production results of the previous quarter.

Crown in particular, we were obliged to point out to you that the drop in Crown's production was as a result of the late start of the Top Star mining site, and that you would see a recovery from Crown. And as you can see in the bar chart, Crown's numbers did in fact improve quite a bit, and this is attributable to Top Star running at full volume in terms of our mining plant.

ERPM, you'll also see the quarter-on-quarter variation. This is because of the suspension of underground mining operations. But there, we also point out to you how Ergo's fared and taking into account the (inaudible) that you see against Ergo represent 50% of Ergo's production for the quarter. The reason being that the final conditions for the acquisition of Mintails' 50% were only met after we had closed the quarter. So, while the effective date of this transaction is retroactive to include all the production from January, we would only recognize those in this new quarter in terms of accounting practice.

So, if you were to add up the difference in Crown, the improvement in Crown, and the total values that we see coming out of Ergo, the total ounces, rather, that we see coming out of Ergo, you could see that we are approaching the point where the two surface operations make up the gap caused by the suspension of underground production at ERPM. And obviously, those come at significantly lower costs per unit as well.

Turning to the next slide, slide number five, it's a brief synopsis of the operating results of the group for the quarter, and then also with comparisons for a comparative analysis quarter-on-quarter.

The total gold production, pretty steady with some gold left on the table due to the accounting treatment of Ergo. As I said, that would obviously be recognized this quarter. Cash operating costs were pretty steady and, in rand terms, went down slightly.

We saw a significant increase in the gold price in dollar terms and also in rand terms. In fact, halfway through the quarter I think we were selling our product for the highest price ever in rand terms, if I'm not mistaken. It went to ZAR300,000 and we saw quite a bit of our gold at a plus, a better than ZAR300,000 per kilo.

Net profit is up 30%, and this is very much as a result of steady production which benefited from higher gold price.

In CapEx, as you can see, CapEx is slowly coming down and that is because in both Top Star and Ergo. Top Star we've spent the last of the CapEx and, Ergo, we're in the final phases, with this current quarter being the last of higher CapEx.

Going to the next slide, I'll send you over to Craig Barnes, our CFO, to take you through the financial review and also the balance sheet.

Thanks, Niel. And good afternoon or good morning, everyone.

And on the income statement, just to highlight a few numbers. Our gold revenue was up 13% quarter-on-quarter to ZAR536.5 million. This was mainly as a result, as Niel mentioned earlier, because of the 15% higher received rand per kilogram gold price in the quarter.

Included in the net operating cost number is our cash operating costs, which actually decreased by 5%. And that was mainly the result of the deficiency close-down of the underground operation at ERPM, or suspend those operations, and we've seen a drop in those operating costs.

The operating profit number has therefore increased by 38% to ZAR129.9 million in the quarter.

Our investment income mainly comprises interest of around ZAR17 million. We've seen a drop in that number due to the fact that our cash number on our balance sheet has dropped slightly, as well as we've also seen a decrease in interest rates back here in South Africa as well.

There's a small amount for impairments of ZAR3.3 million. And the financial liabilities line on the summary in the slide relates to a mark-to-market movement on our preference shares owned by our black empowerment partners.

And treated in the other cost numbers will be the reason for the major reduction out of costs. It was mainly the result of the provision in the previous quarter for retrenchment costs at ERPM, and also effectively a reduction in our environmental rehab provisions due to, again, interest rate movements and a drop in our local inflation rate.

And that gets us to the profit before tax of ZAR95 million, which is 51% up from the previous quarter. Our tax number of ZAR51.5 million includes current tax management of Crown of ZAR25 million, which has increased due to the fact that their profits have increased in the quarter. And a deferred tax adjustments of ZAR26.3 million is included in that number, mainly from Blyvoor. That left us with a net profit of ZAR43.5 million, which is 30% up over the previous quarter.

On the next slide, our balance sheet. A couple of things to highlight on there. We still maintain a strong balance sheet, which still has a significant amount of cash, ZAR545 million from the previous quarter of ZAR609 million.

Again, to emphasize that we have long-term borrowings on our balance sheet. What you see under long-term liabilities is mainly our rehab provision, as well as the preference shares again relating to our black empowerment partners. And our current ratio is still quite a healthy number.

I'll hand you back to Niel to take you through the rest of the slides. Thank you.

Thank you, Craig.

If you'll go to the next slide, the operational review of Blyvoor. You see that underground production was slightly up. This is not withstanding an interruption during January when a lightening strike hit one of our substations and caused a suspension for a few days of production at our number five shaft. This really indicated to us just what Blyvoor is capable of if it could produce without interruption. It achieved just under 9,000 ounces for the month of February.

The Way Ahead project has been going according to schedule, going according to plan, and it reached 807 square meters in March. We had quite a stormy summer with a lot of rain and that, of course, impacts your surface production. You've got to pull your people off the tailing stands during rain storms for fear of lightening. That slightly affected surface volumes. And we also had a few pipe failures, a number of pipe failures and refurbishment [hubs] during the month of February at our surface operations.

On the whole, though, Blyvoor's production, taking into account the first quarter of the calendar year, was not disappointing. It was pretty steady. Operating profit, obviously, is up significantly because of the better gold price. And we're quite pleased with the way that they also contained their costs.

Operational review of Crown. You can see the trend going back up again mainly due to Top Star. Crown's volumes for two of its plants, Crown and City Deep, were remained fixed at 400,000 tonnes per month. A year ago we were doing 600,000 tonnes but we've brought that down to 400,000. And for the immediate future, that is where it will stay.

I have mentioned in the past that one of the reasons why we decided to invest in Ergo is because of the Crown's deposition facility, its tailings facility was nearing the end of its life. So, dropping the volumes down to 400,000 tonnes per month is part of a managed phasing-out of these tailings.

We review this on a quarterly basis. And the phasing out of these tailings will be done in such a way as to coincide with the development and synergies between Crown and the Elsburg footprint, from the Elsburg circuit, Elsburg and Ergo circuit. That is really where the center of gravity of our surface operations will increasingly migrate to, due to the fact that we have significantly more deposition capacity up towards the far east [ramp].

On the next slide I deal briefly with some of the synergies that I think is something that we want the market to understand and appreciate, that the fact that our tailings are stable and it is while they are stable that we want to implement the closure of those tailings and the phasing-out of those tailings, and do it in such a way that we can maintain surface production run rate as we've previously undertaken and previously planned towards.

We started the feasibility study on the Crown and the Ergo synergies. And on the next slide we elaborate slightly -- a little bit more on that.

Pretty happy to see Crown's production back up again, about 20,000 ounces. And that's where we want to keep it for the medium term, while Top Star is a part of that mining profile.

On the next slide we'll see a plant. This plant covers an area which, from the left-hand corner of the photograph to the right-hand corner, spans roughly 40 kilometers. And each one -- or in the plan itself, or in the photograph, you'll see an indication as to where the various facilities that form part of the surface operations in the central and east (inaudible), where they're all situated.

Crown Plant, which is where Top Star is being treated; the City Deep plant, where we are treating the remnants of the (inaudible). And Knights Plant, which functions independently of the Crown and City plant, but where our [pacing] materials from the European are being treated.

And the Elsburg Complex. This is a tailings complex that comprises just over 185 million tonnes, which would be the resource that we'll be mining over the next 12 years at Ergo.

And then way to the right, the Ergo Plant, where we now own the rights to the CIL-1 circuit, where we will be treating 600 -- or we are treating 600,000 tonnes of surface materials per month. This is to increase to 1.2 million tonnes by July. Hopefully, reach steady state by September of this year.

And at the bottom of that picture you'll see the Brakpan Tailings Deposition Site, which has the capacity at this stage to receive the entire Elsburg Tailings Complex, the entire L-29, which we are busy mining. And ultimately, also the remainder of the resource under Crown and City.

The red line depicts a seamless line of surface rights and (inaudible), and superimposed on this illustration, to demonstrate that Crown has the ability to link up, or DRDGOLD has the ability to link up all of its existing surface workings, both towards the west and also towards the east. And this essentially is what we are looking to do going forward in order to maintain and to ensure that we maintain surface production run rate.

Now on to the next slide, the operational review of ERPM. There you obviously see a pretty sharp decline in volume, and that is at the result of the suspension of our underground operations. We're continuing to track towards a containment of the underground cash burn of ZAR2.5 million. And you can see that, at this stage, the total loss for the quarter, cash loss for the quarter, is ZAR17 million.

We did quite a bit of reclamation from underground. We also maintained our underground pumps up until very late in the quarter in order to maintain access into the lower lying areas, or the deeper areas, for purposes of reclamation of material. That has now stopped.

We're also starting to lift certain sections of the railway connection into the plant. We'll put all of that material (inaudible) to the plant as well. The plant is still operational and we'll keep it operational for the near term.

ERPM has under its control approximately 29 million resource ounces and it has the infrastructure with which it can access those. The limiting factors at this stage is its volume capacity, and also the fact that, after we decided to suspend water pumping, it's no longer capable of cooling underground areas down to sustainable and legal standards.

We will continue to maintain the infrastructure, though. We will keep access to this whole body intact. We believe that in a different gold price environment it may still represent significant optionality, option value, to a sort of investor who is interested in taking a long-term view on gold. And as and when such an investor were to emerge and would be prepared or make himself to be prepared to invest in the opening up of those areas, it's the sort of transaction that we would obviously look at.

For the time being, through, maintaining this whole body and keeping the infrastructure intact is within the means of our company. And we would continue to do this probably for the next two year before taking a view of where the gold price is going to go.

Moving on to the next slide, slide number 12. The reason why this slide was included is concerns have been raised about the ERPM rehabilitation liabilities. Our rehabilitation liabilities, or environment management liabilities, are made up of two main items, the first one being underground water and the second one being large tailings dams or mine dams.

In respect of both of those, ERPM finds itself in the situation where it's perceived risks in fact have compelling synergies with Ergo. Firstly, all of its surface materials are going to be treated at the Ergo Plant over the next 12 years, and also at the Knights Plant.

Its two main surface deposition sites are Cason and the Elsburg facility, and both of those are in the process of being pumped away and reclaimed for gold, after which the materials get deposited in the East Rand, on Brakpan and the [Roikholder] position facility, respectively. So, as far as that part of the environmental management is concerned, it is really a process which is paying for itself and, in fact, part of our core business.

Insofar as the underground water is concerned, though, we believe that, inside Africa, water is ultimately going to become, I mean, even scarcer commodity than what it currently is. We've had probably a decade of very good rains in South Africa. But ultimately, it is a dry country and more and more people require water, especially in the (inaudible) area.

So, what we've proposed to do is to maintain control over our central shaft and ensure that we're putting pumping capacity at about 300 meters below surface. This we'll start doing about a year from now, depending on what one of our neighbors does with the water levels. We have a neighbor who wants to catch the rising water at 600 meters below surface.

If that process is not successful, we will be installing a pump at 300 meters below surface, from which we'll be pumping roughly 16 million liters of water per day into our high-density separation plant. We've done that in the past, but from more in a kilometer below surface. And most of this water would then go into the Ergo circuit for use, consumption, and the balance would be sold off to a recently established water utilities company who is in the process of negotiating various (inaudible).

So, in respect of both the two perceived high-risk environmental issues, there are self-sustainable long-term solutions and we don't consider that to be a risk from an ERPM perspective.

Moving on to the next slide, slide number 13, the operational review of Ergo. Ergo went into production, serious production during this quarter, and has managed to produce an attributable 1,700 ounces. As stated earlier, we recognize only half of its total production in view of the fact that the last of the conditions for the completion of our transaction with Mintails were made after quarter-end. Those would be recognized in the new quarter.

We are very pleased with the volumes that Ergo's treating. It's staying on target. We're also very pleased with the costs per tonne that Ergo is treating.

We were delayed in commissioning the Elution Plant. We had hoped to start that in March. In March were ready to go. But because of an interruption with a delayed order in the supply of gas into the Elution Plant, that was pushed out. And once the gas eventually was delivered, there were a few minor engineering issues that we had to attend to, which added about another week to the commissioning. But we finally managed to commission this plant in April and effect the first smelt.

Moving on to the next slide, slide number 14. These are photos of the second phase of Ergo pipeline linking the Elsburg facility to the Ergo Plant. And what it basically depicts are the pump station itself, the tank form, the slurry form. And then also, the picture on the left-hand corner, a worker is tunneling underneath one of our roads in order to cross the road below surface.

We're hoping that this would all be in place in July, that the Ergo volumes would then go up to 1.2 million and that we achieve steady state productions in September of this year.

Moving on to the last slide, looking ahead. The (inaudible) consensus about (inaudible) suggest that gold price should go through USD1,000 this year. At current gold price, our company is favorably positioned. At a gold price higher than USD1,000, obviously our company becomes very attractive insofar as free cash flows is concerned.

We do believe, though, that short-term volatility remains a risk. And as a result, we do take a pretty conservative approach in our near-term strategic decision making. Our main objective in the near term is to achieve steady state at Ergo.

We will continue to manage our risks. We will continue to be very disciplined insofar as spending is concerned.

From an underground perspective, safety -- or poor safety performance has become very expensive, so safety remains very high on our list of priorities.

Before we look at -- start looking at large external (inaudible), we want to make absolutely certain that our existing footprint, or our existing footprints, are optimized and that we especially also develop in a manner which makes sense the synergies between Crown and Ergo in order to maintain our surface production run rate.

Growth remains for our current ambitions outside of the Company's current combination. Our portfolio of operating assets remain relatively modest. We will look at smaller acquisitions if it adds to our headline earnings per share. But there is no big deal at this point in time envisaged in terms of which we have to go to the market and dilute earnings unnecessarily.

That is not to say that we will remain static and that we close our eyes and our ears to opportunities. We do believe that compelling opportunities are emerging in Africa, especially now since so many of the younger exploration companies have run into financial difficulties. Some of those projects do show very good promise and we do keep an eye and an ear open for opportunities that may come our way as we go along.

Ideally, though, we would like to really get going insofar as external growth is concerned once we know that Ergo is achieving into the operating parameters which we had set in modeling the project.

That is it. Thank you very much for taking the time to listen to our presentation and to follow the presentation. Craig and I will now take questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS.) Gentlemen, we have no questions. Would you like to make some closing comments?

Once again, thank you very much, everybody, for taking the trouble to listen to us. (Inaudible) see you when we went to New York earlier this year, but probably around thereabouts June/July and give our calendar Q update. Thank you, everybody.

On behalf of DRDGOLD, that concludes this afternoon's conference. Thanks for joining us. You may now disconnect your lines.