DRDGOLD Ltd (DRD) 2010 Q2 法說會逐字稿

Good afternoon, and welcome to the DRDGOLD quarterly presentation. 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). Please note that this conference call is being recorded.

I would now like to hand the conference over to Niel Pretorius. Please go ahead, sir.

Thank you very much. Good afternoon, ladies and gentlemen, thank you for joining Craig and myself for this presentation. We intend to take you through the financial performance of the quarter, some of the main ethics of corporate activity in which we engage and then also some of the main trending and where we believe trending is heading towards in respective material quarters.

Please if you would familiarize yourself with the contents of slide number 2, the disclaimer, and then turn to slide number 3, highlights for the quarter. We are pleased to report a significant turnaround in operating profits from a loss of around ZAR4 million in the previous quarter to an operating profit of ZAR87.4 million.

This is attributable to a significant increase in gold price of 12%, a 4% increase in gold production mainly as a result of improved performance at Ergo mine and then also an 8% drop in cash operating cost. Our strategy in order to de-risk the business is also forging ahead.

Most of our production is coming off surface operations at the moment. We also see handsome upward trending in our ErgoGold circuit and we also further de-risked the business by further reducing our exposure to volatile deep-level underground mining in the past quarter. We are also taking very cautious and modest steps in exploring an orebody in Zimbabwe and establishing relationships there in order to be able to hit the ground running if and when that country's fortunes, from a political stability perspective, will return.

The next slide is just an introductory slide, slide number 4, to the main trends that we saw in the group in the last three months. If you would please go to slide number 5, the slide shows you both the underground and the surface tonnes that we moved, and that we treated in the past 6 months and the trending of the 6 months.

As you could see, we are treating on average, at the moment, just over 1.8 million tonnes of surface material, dump reclamation material per month, and our underground tonnes are also trending towards 60,000 tonnes per month after hitting a low in October during the labor strike, the four-week labor strike.

You will recall that the first two weeks of the quarter under review, we still had labor strikes. We did not have any impacts on our surface operation production numbers, but we did see a significant drop in underground, as the following slides will also point out.

Turning to slide number 6, gold produced. There too, we saw quite a handsome increase in surface production mainly as a consequence of Ergo's production increasing and a significant change also in underground, recovering of the loss during the labor strike, and now also finally starting to see the upside of an improvement in grade.

Turning to slide number 7 yields, both underground and surface. The underground yield is an indicator as to progress back towards the high grade areas. You will recall in pervious presentations, we told you about the seismicity that we had in the previous year, around about May of last year that knocked out many of the high grade panels in Blyvoor. We're in the process of regaining access into those panels.

I think the trending that you see now should continue through to March. We are seeing recoveries of better than 0.04 gram a tonne at the moment, and we are track on getting back to where we want to be in March, which is also the date around which we want to consider lifting Blyvoor out of traditional management. And then yield from surface is pretty steady.

Turning to the next slide, slide number 8, cash operating cost rand per kilo, you could see that both surface and underground trend is nicely down; surface as a consequence of higher output and then also underground higher output towards the end and an improvement in grade.

Blyvoor made a good recovery towards the end of the quarter. It started off at a significant loss at the beginning of the quarter, but returned some handsome numbers back towards the end of the quarter, the Christmas break not withstanding.

Moving on to the next slide, number 9, what we decided to do this quarter and we'll continue to report this on an ongoing basis, is just the breakdown of the main cost drivers in both circuits, surface and underground. The contribution on the labor part, cost towards labor, both, surface and underground, stores, electricity, water and other.

Obviously, all of these represent a risk -- a different risk dynamic. And I think by looking at these, our investors could see the risk exposure that we face in both circuits. Electricity, I know, is of particular concern. One of the [majors] reported earlier this week on the impact that he believes, electricity is going to have going forward.

I think there one could see the difference in ratio, number of power units in respective of every kilo of gold produced in the surface circuit, and also the number of power units in the underground environment. Obviously, that poses a significantly different kind of risk in the two types of operation. Labor also, I think is quite clear, it's the difference in exposure in that regard.

Moving on to the next slide, slide number 10, we've taken the previous slide and just hid it up in the pie graph. What I should point out in the surface, the big chunk and the other ZAR46,000 per kilo under other, that is mainly made up of contractor costs. And I think in future slides we would simply just have a separate segment depicting contractor costs, and then other costs being the levies that we pay and so forth.

And I think we will also post a breakdown that provides a better depiction on our website going forward, if there is such a need; if you believe that there is -- just bring this to our attention. But there again, I think it's quite clear. We have -- how much smaller -- the two main risks, electricity and labor, how much smaller a risk they pose within the context of the surface operations, especially from the perspective of interruptions in production.

Moving on to the next slide, slide number 11, cash operating cost, rand per tonne. And that is really your indicator of efficiency; recoveries per tonne, by and large, an indicator of the quality of your geology and the quality of the orebody.

But this shows you just how efficiently the material is being moved; ore and reclamation material is being moved. And in both of these, we're seeing the trends that we like.

Moving on to the next slide, slide number 12, that introduces trends around Ergo. Ergo has petty much become the center of gravity of our surface operation, and hence we will continue to publish these slides depicting the Ergo trends until such time as we are closer to the recovery expectations that we created with the market in the past.

Moving to slide number 13. As you could see, yield in Ergo has finally come to the 0.10 mark and it's on its way to 0.12 and hopefully will settle down at around 0.14. This is more as a consequence of introducing more Elsburg material and by leaching out the Benoni material. Later on, when I deal with the grades that are being introduced into the circuit, I will spend a little bit more time on that.

So moving on to the next slide, slide number 14, there you could see that the Ergo circuit is trending handsomely towards the mark of [1.2] million tonnes. There was a slight reduction in December, mainly to do with rainstorms. We had significant rainstorms in Johannesburg, and then also some additional engineering that's taking place, the installation of booster pumps and an additional pipeline.

And this is all in order to accelerate the amount of material that we could recover from Elsburg into the circuit, in an effort to further dilute the Benoni materials, which we consider to be of an inferior quality.

Moving on to the next slide, slide number 15, there you can see that notwithstanding the drop, late in the quarter, in volume, that actual gold production has in fact increased. Looking at slide number 15 and then also turning to slide number 16; slide number 16, you'll see that the grade Ergo has also slightly come up. And this is consistent with the grade that we expected to recover from Elsburg.

So more Elsburg material means slightly lower grade, higher production, even at a slightly lower volume in December. And that is basically because the use that we're getting of this material is definitely better, superior to that of the Benoni dump.

The Benoni dump, if you recall, is the smaller of the two and we'll be done with that by hopefully the end of this year. We've -- the logic has been diluting its contribution into the circuit.

And the main resource, the Ergo with the Elsburg dump, a 180 million tonne resource, that's going to be mined over the next 12 years. And that is the core focus of the Elsburg and Ergo projects.

Moving on to slide number 17, cost per tonne, Ergo has settled down nicely at about ZAR23 per tonne.

Moving on to slide number 18, operational review of Blyvoor, there you could see the drop in ounces over the last six months. The October slide is not depicted as graphically as it had in fact occurred during that period, during the labor strike.

But what you can see is, towards the end of the quarter in December, the yellow line going through the black line. And Blyvoor in the last month giving us a profit that made up the bulk of its contribution, cash operating profit contribution of ZAR12.6 or $1.5 million, and in December, it was in fact handsomely [a part] of the CapEx too.

Operational review of Crown, slide number 19, Crown again was very steady. We saw a good trending from July of this year through to December in its production, after we had to adjust its volume flows as a consequence of the tailing deposition sites.

Phasing out -- the phasing out of the Crown tailing deposition, you'll recall that we brought our volumes down from 600,000 tonnes a month to 400,000 tonnes a month for the Crown circuit. I think we've now adjusted to these adjustments in volume. And as you could see, production has trended back up again to just over 20,000 ounces per quarter.

[Costs] were consistent with the budget, and we saw a handsome profit of just under ZAR40 million, $5 million for the quarter.

Operational review of ERPM in the next slide, slide number 20. ERPM is now up and up. As a surface producer, the ERPM numbers that you're seeing here is recoveries from its dump, the Cason Dump, that will go into the Knights Plant.

Its production came off slightly in the quarter, but it still gave us a very good profit of ZAR18 million for a small circuit. Its production unit costs are still very attractive, and you could see that the cash operating cost line is significantly below the revenue line in the middle graph in the bottom-left of your screen.

Then moving on to Ergo, slide number 21, I'm very happy to be able to report that the yellow line has finally reached the black line, that revenue now exceed costs and that Ergo is now running at a profit.

We made a ZAR13.3 million for the quarter, and most of the capital for the project now being spent. So the money that you see, in cash operating profit, very close -- going forward will be very close to the actual cash profit of the CapEx.

I'll ask Craig to take you through slide number 22 and slide number 23, the financial review income statement and balance sheet. Thank you.

Over to you, Craig.

Thank you, Niel. Good afternoon everyone.

On the income statement, you can see that our revenue increased quite significantly by 12% to ZAR499.6 million from ZAR445.2 million in the previous quarter. And that was mainly as a result of the higher rand gold price for the quarter.

Our net operating costs decreased during the quarter over the previous quarter. And in fact, our cash operating costs were down by 4%, and that was mainly as a result of going back into summer electricity tariff and as well as the Blyvoor restructuring, which had the result of decrease in cost at Blyvoor.

And this resulted in an operating profit of ZAR87.4 million in the quarter compared to a ZAR4.2 million loss in the previous quarter. The finance income number is all the interest proceeds. As you would expect, it's decreasing because of the lower cash balance at the end of the quarter.

Retrenchment cost of ZAR18.1 million included retrenchments mainly at Blyvoor as well as the completing of a retrenchment process at ERPM and also retrenchment that occurred at our corporate office.

The other cost number is mainly our admin and general costs, which has also come down. That resulted in basically a breakeven for the quarter. The tax number it appears as ZAR6.3 million and includes a current tax expense -- basically all coming Crown of ZAR7.7 million and a deferred tax credit, which was raised for the quarter of ZAR14 million, resulting in a net profit for the quarter of ZAR6.4 million compared to the loss of ZAR63.3 million in the previous quarter.

Going on to the next slide, slide 23, the balance sheet. And as you can see, we still have a very strong balance sheet. The cash balance is sitting at over ZAR106 million -- ZAR160 millions. And important to note as well that we have no interest-bearing debt. We're still debt-free, and our current ratio is still pretty strong.

I hand you back to Niel now, to finish the presentation. Thank you.

Thank you, Craig.

If I could ask you to move to slide number 24. We had just under ZAR500 million worth of corporate activity over the last few weeks, consisting of the disposal of 60% of Blyvoor to Aurora, a newly established firm, local firm, for ZAR296 million. That deal will effect in June, that's when we'll see the money. And an additional ZAR80 million facility, loan facility to Blyvoor, which will rank pari passu with the other shareholder loan into Blyvoor.

And we've also agreed to sell the plants at ERPM. We disposed ERPM's underground circuit and we agreed to sell its underground circuit plant to Aurora for ZAR20 million, and they need this for their mine in Orkney. The effect of the transaction is basically as follows.

They gave us a ZAR5 million cash deposit. And the outstanding amount of ZAR15 million, we have an election to undertake in cash or to the extent that we believe that the Grootvlei tailing dams -- which I'll deal with a little bit later on, and the Marievale tailing dams also, which is situated in close proximity of our Ergo plants -- if we believe these to be feasible to mine and to introduce into that circuit, we may in lieu of the ZAR15 million, establish a 10-year exclusive option to mine those two dams and treat them through our Ergo plant.

And that's a decision that we'll take after doing a feasibility study in the next few months, months to come.

The next transaction we did was to acquire from Mintails, the balance of their interest in Ergo Mining (Pty) Ltd. Whilst we had previously acquired their entire interest in the gold circuit flowing into Ergo, the Elsburg Gold circuit, we now will also earn, once the transaction is effected, the balance of their interest in the holding company, so to speak. Ergo mining owns the plant. They also earns the right to the uranium and asset upside associated with this footprint.

The net effect of this transaction in the near term would mean for us, access to the second CIL gold circuit, which means that we can introduce additional materials into the Brakpan plant and increase the volume throughput of the Brakpan plant.

Agreed value of the transaction is ZAR82 million. We'll pay this in cash -- ZAR62 in cash, and ZAR20 million is in respect of shares that we hold in a company that owns properties on the Far West Rand, Witfontein. We've -- a tailing dam is -- properties feasible for the construction of a tailings dam, which will obviously give Mintails a strategic advantage, a competitive advantage in that region when it comes to the development of surface reclamation in the Far West Rand.

Our focus going forward, if you would turn to the next page, page 25, that is a photograph, an aerial photograph of our entire footprint. We basically start in the left-hand corner, that is west, all the way through the east. Just north of the Crown plant is the central CBD of Johannesburg.

And this is an area of approximately 40 kilometers wide. Further to the west is where Mintails will have their circuit, and where they will now, with the Crown plant acquisition, have a competitive advantage.

And I think we have to a large extent, a very strong competitive advantage insofar as the Central and East Rand is concerned. There is simply no room for another plant, another tailing deposition facility, and just a very little chance that anybody would be able to establish the various surface rights (inaudible) to build pipelines between all these various dumps.

We will now have access to just over 1.4 million -- 1.4 billion tonnes of material, which we could treat over the next few decades. I think practically accessible is material in the region of 800 million tonnes, and you could work out at the rights of just over 2 million tonnes a year. So how long it will take to mine that up.

So this part of the business is to a large extent evolving into something I suppose one could compare to an annuity, taking into account that after you clear a site off residue materials, there's a property development upside that arises at that point.

Moving on to the next slide, slide number 26. This slide is intended to, on the similar scale as to the previous slide with the Ergo, show you the route that the Ergo Crown pipeline is intended to follow. We had to adjust the volume flows of Crown because its tailing dams, depicted in the middle left of the slide, is reaching saturation point.

And we're only putting 400,000 tonnes a month onto those dams. We still have about four to five years of treatable materials beyond Crown's current life of mines in the footprints that falls under the control of Crown.

In order to treat this, and also [as a portal] further west, to materials further west, it has become necessary for us to build that pipeline between Crown and Ergo in order to treat those materials and then ultimately dump it on to our tailing disposal facilities in the Far East Rand.

And the red line shows you where this pipeline will run. We have an uninterrupted line of line rights over which we can build this pipeline. Believe that the capital costs inclusive of the plant upgrades and tailings upgrades would be in the region of ZAR350 million.

It will add four -- life, four years to Crown's life, beyond the current life of mine, by another six years. And then after six years, we could look further east -- and west I would imagine, but further east in respect of tailings already under our control in order to maintain Crown's current run rate and Ergo's current production run rate.

Slide 27 explains my last remark of moving further east. There you could see on the slide the Grootvlei and Marievale dumps over which we may not secure an option to mine. Within the context of the European plant transaction or as a consequence of that transaction, you can see the size of that resource -- 117 million tonnes of materials that will -- that contain currently just over a million ounces of inferred resource of which current technology would allow us extract between 45% and 48%.

Then moving on to the next slide, Zimbabwe, slide number 28. Zimbabwe is not really seen much in the development of new resources since the Second World War. And we've been stretching around a little bit and we believe that we have now managed to reach agreements with the appropriate partner in respect to the appropriate footprint for us to establish an early bird advantage, so to speak, should Zimbabwe's fortunes turn.

I'll ask you to turn to page 29 or slide number 29 that provides some insight into the relationship that we've established. We've gone into a 50-50 venture with Chizim Investment. It's a local entity. They secured 32 contiguous claims of 550 hectares that is between two already established mines in Zimbabwe. Number of trenches were dug that we're finding values ranging between 8 gram a tonne and 25 gram a tonne.

We've decided to commit an initial ZAR5 million in seed capital to grow the resource. In the next 12 months, we intend to learn more about this resource. We will keep our initial capital investment modest until such time as the political environment has become clearer and we have greater certainty that our assets are safe and that our shareholders' investment is safe.

What's particularly affective about this -- would you turn to the next slide, you could see that is -- basically everything is on surface, the open-cast mine. And because of the occurrence of free gold, we could to a large extent rely on gravity technology to separate out the gold, and not initially worry too much about chemical plants.

Going on to the next slide, slide number 31, our vision going forward, looking ahead. Good price, the gold price is currently in Rand terms, in a very favorable place for us. We're planning our business at current gold price levels. We believe that there is probably still room for it to improve. But our models have not obtained an increase in the gold price.

We are planning our business according to where the gold price currently is. I think we are progressively moving to a model that resembles, I would imagine, an annuity type of investment where the only risk is gold price, and where the operational risk, to a large extent [pressed] by the nature of the business.

Going forward, we will continue to focus on improving the efficiencies of our surface operations, developing synergies between the various surface circuits. Blyvoor is in the right track, on the right track. Its grades are improving.

We believe the decision that we took to place it under judicial management and protect it against hostile creditor action, which is similar to the Chapter 11 proceedings in Northern America, is proving to be a success. It was met with some consternation initially, but I think it is having the desired effect. It has given Blyvoor the timeout that is needed in order to develop back into the high grade, and we're seeing the consequences of that now.

And growth prospects going forward, we remain cautious. And to a large extent, at this stage, just focused on making sure that we don't miss the bus, that we establish the necessary relationship, infrastructure and also gather sufficient information to be able to get the hit the ground running as and when the circumstances change for the better.

That concludes this presentation. Greg and I will now take your questions.

Thank you very much, sir.

(Operator Instructions). Ladies and gentlemen this is the operator. I have received news from Mr. Pretorius that we are to continue without him. Mr. Barnes, I will now move to the q-and-a.

Our first question comes from Leon Esterhuizen of the RBC. Please go ahead.

Yes, hi, guys. Sorry. I just wanted to check with you two things. I need to just get some confirmation in terms of what you expect in terms of rand per tonne costs going forward for Blyvoor, and for the surface treatment circuit. Especially Ergo, we can't be expecting about ZAR23 per tonne.

And then the same line of questioning, just in terms of grade. You said we are looking for 0.14 grams per tonne from the Ergo circuit. What are we looking for in terms of Blyvoor at steady state, going forward?

Thanks, Leon. To first the -- to answer the question about the rand per tonne cost expected at Ergo. I think for this quarter ended, it was around about ZAR21 per tonne. But I think going forward, we're looking probably between ZAR23 and ZAR25 per tonne.

It (inaudible) water costs at Ergo, we are trying to secure cheaper water coming from our ERPM -- our old ERPM underground operation. But for now, you'll see the cost remaining around ZAR23 to ZAR25 a tonne at Ergo.

Blyvoor?

Blyvoor -- you are talking about Blyvoor surface or Blyvoor underground?

No, Blyvoor underground. We used to run at, what, ZAR800 to ZAR900 a tonne. Are we going to get back to those levels?

I doubt if we're going to get back to those levels, Leon. I think you're going to pretty much see us staying basically where it has been in the last couple of quarters and maybe moving down towards around about ZAR1,100 a tonne.

Okay. (Technical difficulty).

As far as your question on the grade, as Neil has said that we -- I mean, it's [0.14] grams a tonne at Ergo. At Blyvoor, I think the current grade is sitting at (inaudible) grams a tonne, but we've been moving up to round about 4 grams a tonne, once that high grade areas are accessed again.

Okay. Just one more thing. The swing in the corporate admin cost, I think, it's about a ZAR20 million swing. Which number do we take as the representative number going forward?

Again, admin -- and admin expenses and general costs include corporate costs and other -- various other costs as well sundry income. I think corporate costs we're having for around ZAR64 million for the entire financial year.

The swing around in the admin and general costs to -- admin expenses and general costs this quarter was an insurance claim, which came through the sundry income which is lumped together with that.

Okay, thank you.

Okay.

(Operator Instructions). We'll just pause a moment to see if there are any further questions.

Mr. Barnes, it appears we have no further questions. Would you like to make some closing comments?

Yes, I just like to thank everyone for staying on the call. If there is any query, you can contact me -- myself or Neil directly, and we look forward to hearing from you again. Thank you very much.

Thank you, sir.

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