DRDGOLD Ltd (DRD) 2012 Q2 法說會逐字稿

Okay. Good morning ladies and gentlemen. Welcome to our December results. Just upfront, I'd like to apologize for Niel, unfortunately he couldn't attend today's results presentation. He unfortunately has a family bereavement that he needs to attend to. So, our thoughts are with him and his family. I am sure he would have loved to have presented these results, which are really, really good set of results as you've probably seen already.

Okay, that's our disclaimer. Just to get straight into the highlights for the quarter, I think a lot of people have been waiting to hear what we were going to do about interim dividend. Is that sound working properly? Yes, is it okay? And I think no surprise, we -- the Board decided to declare an interim dividend of ZAR0.14 per share. You will recall then our dividend for the full-year 2012 was ZAR0.10. So, this interim dividend is obviously a very big improvement on last year's dividend. And it came about obviously as a result of the very good results that we have presented over the last two quarters.

We have said before to the market that we would be targeting around about a 4% dividend yield. I think if you do the numbers and you assume that we are going to pay a similar dividend in the second half of the year, and we are getting pretty close to that number. You will now also probably find that we are amongst the largest dividend payers in terms of yield in the gold industry in South Africa.

Our production was up 9% for the quarter, which was an exceptional result for us at just over 39,000 ounces. And I think it's pretty much in line with the guidance that we have been putting into the market. That was largely driven by an 8% increase in our throughput into the Ergo plant. I mean, that -- those volumes are sitting at around about or just over 6 million tons per quarter or 2 million tons per month. And I think it's pretty much in line with the guidance as I said.

Revenue up 10%, that would be a function both of the increase in production as well as the 7% increase in the rand gold price during the quarter to just under ZAR480,000 a kilo. And obviously the higher production has assisted with our cash costs, which have decreased by 12% for this quarter and sitting at just above that psychological level of $1,000 an ounce. If you look at the aggregate costs, you would see they remained pretty steady, maybe a slight increase over the quarter, but really assisted by the increase in production.

Operating profit for the quarter was up 37% to just under ZAR240 million and that just again shows our sensitivity of gearing to the rand gold price. I know a lot of analysts have asked this question, how does the gearing work in our Company, but basically a 10% increase in the rand gold price would mean that our operating profit or EBITDA would increase by around about 26%, and a 20% increase in the rand gold price would result in a 54% increase in our operating profit. So, as you can see, our numbers are very sensitive to the rand gold price.

Our headline earnings per share for the quarter was up 25% to ZAR0.25. Now, you will recall in the previous quarter, we had received a dividend from Village Mine Reef of approximately ZAR26 million, which if you strip that out of the previous quarter's headline earnings per share of ZAR0.20, the amount was about ZAR0.07. Then the headline earnings per share increase for this quarter is actually more spectacular at 92%, up.

Some Ergo trends, I think that's the Elsburg Tailings facility, Charles, that picture. In terms of volume, as I discussed on the previous slide, you can see that our volume really drove our increase in production, and our volume is sitting at just over 6 million tons per quarter now over the last quarter. And that's really as a result of the stabilization now of our Crown-Ergo pipeline. You will recall that in the fourth quarter of 2012, we saw a bit of a dip in our tonnages and that was really when we were decommissioning the Crown plant and switching over all those volumes to our Ergo plant. We are now happy that that circuit now appears to have stabilized and we are comfortable with those tonnages coming out of Ergo.

Same with the grade, really for the similar reasons, we now see our grade stabilizing at around 0.20 grams per ton. Similarly, in the fourth quarter of 2012, we had a slight dip for the same reasons, the decommissioning of the Crown plant and the transfer of those volumes effectively to the Ergo plant. But it now seems to be stabilizing within our guidance of around 0.2 grams a ton. And obviously that resulted -- both the volume and the grades resulted in our 15% increase in production year on year or compared to the second quarter of 2012.

With regard to the -- our project, our large project that we currently are busy with, the flotation/fine-grind project at Ergo, which is really about trying to improve the efficiencies within the plant and improve the recoveries out of the Ergo plant. All the formals have been delivered and have now been installed at the Ergo plant. We are scheduled to begin commissioning as the schedule down the bottom shows. Commissioning of the plant, middle of February, and our production is still on track to or we are still on track to achieve full production, ramp up of production in the first quarter of 2014 or in July. We still have around about ZAR94 million that needs to be spent on the CapEx and that will be spent over the next two quarters.

Group trends, just some tends again that we like to highlight, and these are key indicators that we focus on as a management team, and a lot of these indicators in these criteria, these performance criteria on what management is measured on in terms of our performance bonuses and also other incentives that we as management receive. You can see that our operating margin has now increased to 41%, and that was largely, I mean, driven by obviously the 7% increase in the gold price and also the 7% reduction in our rand cash costs.

Just another trend, I don't want to maybe highlight, but you can actually see pretty clearly on here. You can see the dip in the fourth quarter and also the first quarter of 2013 in our operating margins. And that's that -- I mean some of the reasons I have already mentioned, it was the switchover from Crown to Ergo, the decommissioning of Crown, but there are also other factors that impact those two quarters, the fourth quarter and the first quarter, and that's really on the cost side. In the fourth quarter of every year, we're always going to see these winter tariffs supplied by Eskom, which obviously impact our costs, and it's over a three-month period, for one month in the fourth quarter and for two months in the first quarter of 20 -- of every year.

Another factor that we see in the fourth quarter is the electricity price increases generally coming in around about April. So, those are just factors with regard to costs that we need to consider when we are forecasting going forward. Our EBITDA was up 22% compared to the second quarter of 2012 to ZAR172 million. Again, I mean that would have been impacted by the higher production and also the higher gold price, but you can also see those trends again in the fourth quarter and the first quarter obviously EBITDA being impacted by the same factors.

Headline earnings per share up 67% compared to the second quarter of 2012 to ZAR0.25. Again in that ZAR0.20 was ZAR0.07 relating to the Village Mine Reef dividend. If you strip that out, the increase quarter on quarter was actually in excess of 90%.

Our free cash flow, which is something we monitor very closely and again it's a key factor on which we are measured as a management team. You can see that we ended up quite well for the second quarter at ZAR112 million. You must remember that we are spending obviously a lot of money on the capital -- on the Ergo flotation and milling circuit. So, even in spite of all the capital we are spending, we managed to generate a positive cash flow of capital.

We also in this last quarter had to pay a dividend, the previous dividend of ZAR40 million odd. It was ZAR30 million that was repaid on our previous loan notes. And if you recall, we also put out an announcement about a buyback of share options of approximately, I think it was 24 million [plus]. So, even with all of those outflows of cash, we generated a positive cash flow for the quarter.

On the income statement, you can see that our revenue was up significantly 25%, again on the higher rand gold price and also on higher production compared to the second quarter of 2012. Costs, which obviously is a topic of discussion within the industry and also within our Company, increased -- or net operating costs increased by 25%, but you must remember that our volumes have also increased by 16%. So, a large chunk of that increase in costs is driven by the increased volumes that we are now processing to the -- through the Ergo plant as well as obviously annual price increases year on year for electricity, wages and also consumables, which we have seen rising recently. That left us with an operating profit for the quarter of just under ZAR240 million, up 26%; depreciation, I mean, slightly up which you would expect because of new infrastructure, the Crown-Ergo pipeline, which was completed towards the end of fiscal 2012 which is now being depreciated.

Other numbers I want to highlight that profit before tax up 33% to ZAR143 million. And then our headline earnings per share, as we have discussed, up significantly to ZAR0.25 for the quarter.

On the balance sheet, just on non-current investments and other assets included in they have ZAR140 million odd on our balance sheet is our Village shares that we earned, which over the last quarter did increase in value slightly. There is also a rand refinery issues in that number.

Cash and cash equivalents, basically stayed at around -- remained at about ZAR400 million and that was largely due to obviously the capital that we have been spending at the Ergo flotation milling circuit. And although the cash items that I mentioned on the previous slide, the dividend that we have to pay, the loan notes that we repaid, as well as the buyback that we did of options.

And again, you can see under the long-term liability line, we raised -- we completed a capital raising in I think it was September where we raised ZAR165 million in terms of bonds, loan notes that we issued. And there was a repayment of ZAR30 million on loans that we had issued in previous years. And that is really the only interest-bearing debt that sits on our balance sheet. Our current ratio, you can see has improved, which you would expect with obviously the good results coming through.

Okay. On ERPM, I mean, we have been talking for a long time, and as a management team, we have been looking at various options of trying to extract value for ERPM. What we have decided on and what's possibly going to be the best [re-advice] as a Company is to really package the different assets within ERPM. ERPM Extension 1 and 2, which is a significant resource of 21 million ounces as well as the Cason shaft, which was an old shaft at ERPM in the old ERPM mine working area, where we have spent approximately ZAR25 million on upgrading the plant to a 6,000 ton per month plant. That's basically based on the old ERPM plant footprint, and also refurbishing the old shaft and working areas.

Now, the idea there is, I mean, we are spending on average about ZAR2 million a month at ERPM just to really on care and maintenance and maintaining the ERPM footprint. The idea there is in terms of our strategy, obviously our focus is on surface re-treatment. We believe that we can generate short-term cash flows out of the Cason shaft, which will mean that ERPM as a separate legal entity is self-sufficient. We won't need to fund that anymore and can also assist ERPM in funding the exploration that needs to take place in terms of ERPM Extension 1 and 2, the 21 million ounce resource. So, we are looking to package those assets. And with the intention of disposing of them, obviously they don't fit into our core strategy, which is surface re-treatment.

On Zimbabwe, we have completed exploration drilling at most of our sites, our exploration areas. What we found is most of them are -- will lend themselves to underground mining, which again does not fit in with our strategy. Our focus is on surface re-treatment, as I have said, and we are now going to be looking at packaging those for some type of disposal. We are continually looking at obviously the viability of some surface dumps there, so we'll continue to look at those, because that again that fits in with our strategy, our stated strategy.

Okay, on rehabilitation, obviously a major focus of ours is our environmental obligations and also rehabilitation. And this has become a major issue for us recently because we have obviously decommissioned the Crown Tailings facility. As we know what happens when you decommission a tailings facility, the dams tend to dry out and there is potential for dust pollution. So, a lot of mining and a lot of effort is going into really sorting out the rehabilitation of the old Crown Tailings facility.

The area that we are looking at is about just under 132 hectares, that includes the surface areas as well as the side slopes. Obviously, our primary objective is to control the dust in that area. I mean, if you look at where in that picture those dumps are located, very close to residential areas and also you can see Soccer City in the foreground of that picture. So, it is a very important initiative of ours. And the guys at the operations of Ergo have come up with what we believe is a very effective 5 Point Plan to look at the -- at controlling the dust on those dams.

In this year's budget for fiscal 2013, we budgeted around ZAR23 million and we plan to spend about ZAR10 million to ZAR12 million per annum thereafter. Hopefully, that number will come down over time because of the pressure there to manage that down, but our timeline in terms of this project is to -- because the top surfaces have dried out, you can see in the picture there that there is a lot of grassing still on the side slopes. Our immediate focus area is obviously the top surfaces and we've planned to complete those by March 2013, and then focus on the side slopes and have that completed by 2019.

We have created about 40 jobs drawn from the local community around that area, which involved in obviously the planting and maintenance within that project. These are basically the five points that we are focusing on or that the Ergo operational guys are focusing on. Obviously, they need to repair and vegetate the buttresses. They are limiting the berm used for maintenance vehicle access and looking at watering those areas and cladding them with aggregate material. The side slopes are being vegetated.

And you can -- if you drive past the Crown Tailings complex on the highway going out towards the Soweto or out towards Soccer City, you can see the work that's being done on those complexes, including the side netting and also the vegetation from the highway if you drive past there. The focus area on the top surface area of the dams is to flatten the day walls to improve airflow and also to allow for the side net or the netting that they are putting up there and also vegetation, to facilitate that process.

And then the last point that the guys are looking at is obviously again the top surface area, you can see the windbreaks from the highway and you can see how the vegetation is taking to those top surface areas. And we are pretty confident that we are doing -- the guys are doing a very good job there and that we could have managed to control the dust coming off those dams.

Okay. Just looking ahead in summary, our key focus areas going forward, obviously, the key focus area is to maintain the volumes that we are seeing coming out of the Ergo plant now. We believe we have reached stability and we hope to maintain the 6 million tons per quarter or just over that, which is in line with our guidance. As I said in Feb this month, we start commissioning the flotation/fine-grind circuit. And obviously that is a key area of focus over the next couple of quarters as we ramp up to full production in July.

In Zimbabwe, as I have mentioned, the idea is to clean up what we have there. They are not -- the assets don't exactly fit into our strategy and we will look at disposing of those assets, packaging them and disposing of them. We are going to be moving on ERPM. We are going to -- there is a serious effort now to try and extract value for those assets. It's the last remaining underground assets really in our portfolio. We took care of Blyvoor in the previous fiscal year. And our focus is really going to be on ERPM now and looking at disposing, as I have said, packaging those assets, those various assets for disposable. But the idea there is to -- is we are not going to be putting more money into ERPM. It needs to be self-sustainable and it needs to be packaged as quickly as possible and we need to extract value as quickly as possible for our shareholders.

There are other initiatives with which Jacob and his team are working on and also the guys at Ergo is securing additional water supply. We make use of a lot of water in our Ergo circuit and the focus there from an environmental perspective is to make use or less use of Rand Water Board to water, and more use of potentially grey water which we can maybe obtain from some of the sewage farms around our footprint as well as AMD, potentially utilizing some of that. And that will also have an knock-on impact in terms of costs as well. Obviously, that water will be a lot cheaper than Rand Water Board, but the major focus as I said is on environmental issues there to make use -- less use of Rand Water Board or portable water.

Our EBDA initiative, the Ergo Business Development Academy, has been very successful for us. We have -- I believe we are making a huge difference not just in the communities around our Ergo footprint, but also with our own employees and the idea is to obviously extend that EBDA footprint as much as possible and continue to benefit the communities and also our employees as well through initiatives that we were -- or run through the EBDA, the academy. We are also launching our Best Life initiative, which is an employee development program focused on I suppose values within our Company, health issues, educating our workforce in terms of financial literacy and just equipping them better, so that they can deal with life going forward, and also within the context of our work environment as well. And that's basically I am sure that's a lot shorter than what Niel would have done with it because he likes to talk a lot more than me.

So, I am going to open the floor up for questions. And maybe some of the operational guys will also assist some of the questions.

It's Allan Cooke from JPMorgan. Could you just help us out to the balance sheet? The Village shares that you are carrying on your balance sheet, is that how many and then at what price you carried them at? And then you are still waiting for the remainder of those shares to come through. What are those numbers again please?

Yes, I think it was just over 85 million shares, (inaudible), is that right, 85.7 million shares in Village if I recall.

Is that on the balance sheet now?

That's carried on the balance sheet although if you recall 20 million of those shares were held in escrow until the final conditions precedent of the transaction took place. And that would be basically the Section 11 approvals and consent from the Minister. So, once that has been completed and we get ministerial consent, all of those conditions are waived, that's another option. And those 20 million shares will be released.

Okay. And it's great that you guys have paid an interim dividend, but in line with your strategy, you are cleaning up Zimbabwe and looking to extract value there from the underground potential. It looks like you want to exit finally ERPM and any underground operations there, but you are still exposed through your Village holding to underground a deep-level hard rock marginal underground mining in South Africa. But what are the hurdles to you unbundling these shares to your shareholders? Is there any reason why you need to hold on to them or could they be distributed to the DRDGOLD shareholders, please?

Yes. I think the major considerations for our Board, firstly the 20 million shares in escrow, although you could argue we could distribute the remainder or the balance of those shares already because there are no restrictions on those. I think the intention was try -- because the share price in Village dropped, we were hoping that that would recover and we could extract more value from that, but that is a topic of discussion at our Board. And I think over the next couple of quarters, we will decide and those are the options. We could potentially un-bundle them to our shareholders or we could dispose of them outright. Since, we didn't want to -- we didn't want to dispose of those shares when they were -- when they dropped in value, it doesn't make sense. We obviously wanted to get the value that we initially -- the shares were issued at. But I think over the next couple of quarters, we probably have more clarity on that from our Board.

Okay. Thanks Craig.

Adrian Hammond, BNP Cadiz. Craig, just with regards to ERPM, what sort of value do you place on these assets?

Look, obviously I am not going to discuss value because we are entering into a time now where we are going to be negotiating potential values. But I mean as various valuation models you can run on, on a 21 million ounce resource, I mean you guys, as analysts, would be quite be familiar with placing a value on specific ounces. Obviously, if you are going to build a mine at ERPM, there is significant capital that would need to be spent. So that needs to be factored into any calculation of value. But, I mean, we believe there is a lot of value to be extracted for this asset. It just for us the reasoning behind as we have been talking about previously disposing of that asset is it doesn't fit in with our strategy. It's one of our last remaining underground assets, we need to extract value for our shareholders because it is an asset we own and those are the ones that we really need to focus on, on extracting short-term value for our shareholders. Sorry, I can't be very clear on the value.

That's great.

But they do have significant value, I believe.

And just looking forward with ultra fine-grinding coming on stream next year with a potential uplift to your production, what is the impact on your cash costs from the ultra fine-grinding plant?

Well, we have said previously, I think the guidance we have put out was around about ZAR756 per ton, is that --- is that correct, that's still the number that we are looking at. So, there will be an impact on costs and you can calculate that number.

Thanks. And one last question. Just on your rehab of Crown Tailings dam, you have indicated you will get the top slopes complete this year but the side slopes in 2019. Why so long for that?

Okay. That's a very technical question. So, maybe Henry can give a little bit more clarity on that one.

(inaudible).

Thanks.

Okay. No more questions from the room.

Chris Nicholson at RMB Morgan Stanley. Just wanted to ask you around the tonnages and the throughput, how close is that to full capacity of the pipeline and what the plant can take and kind of the read-through for that going forward in terms of those volumes?

Well, we said I mean the Ergo plant, the current capacity, there is 1.8 million tons per month. The balance of 200,000 odd tons is coming from the Knights plant. And within our guidance between 2 million tons and 2.1 million tons per month is what we believe as capacity there currently. Obviously, the Ergo plant, when it was previously owned by Anglo, had a capacity of 2.4 million tons per month. But I mean we haven't as a Board made any decisions in terms of increasing that capacity as yet. Obviously, our focus was on improving efficiencies at the plant first, which makes sense. Before you increase capacity, you need to make sure you have the most efficient plant.

So, there is potential down the line to increase capacity. I just don't think that's going to be our focus as yet. I think we need to make sure that the Crown -- I mean, sorry that the Ergo flotation and milling circuit delivers into what we are expecting it to deliver, the efficiencies that we are expecting. I know that Niel feels very strongly about also moderating capital going forward for at least another year or so, so not spending a lot of capital on big projects. And I think down the line we are not going to be in a rush, we will make a decision on that down the line.

Thanks.

Okay, there is a question you have from online. In case of a double dip and if there is no recovery which is bad for financial markets, investors will obviously turn to the best hedge which is gold, which is incidentally good for gold industry. What are your plans to handle that demand?

Okay. We'll welcome obviously the much higher gold price. I mean, we are going to be focusing on delivering 140,000 ounces to 150,000 ounces within our guidance per annum. Obviously, if this happens and the gold price goes a lot higher, I mean I mentioned the sensitivities of our profit numbers to gold price increases. So, obviously that will have a very positive impact on the cash generation of our assets and could potentially mean much bigger dividends for our shareholders down the line.

Okay, thank you. If there is no further questions, I think we'll wrap it up. Thanks very much.