DRDGOLD Ltd (DRD) 2012 Q3 法說會逐字稿

Okay, so much afternoon, very good afternoon, ladies and gentlemen. Welcome to our third quarter results presentation. Just while you're looking at the disclaimer, to explain how we're going to run the presentation today, Niel is actually in London and he's going to be video conferencing in. So I'm going to be -- he'll be doing the first part of the presentation and then he'll probably hand back to me to go through some of the numbers.

So let me hand you over to Niel in London to start up with some of the quarter features. Thanks, Niel.

Hi, Craig. Thank you very much. Good afternoon, everybody and thank you very much for taking the time to attend this presentation. As Craig said, I'm currently in London. Hopefully the line is good and there's not too much of a lag on the visuals. So I'll keep it short and get straight into the key features which you'll see on the third page of the results presentation.

As in the past, we're comparing our results to the comparative quarter in the previous financial year and based on those, we are encouraged by the trends that we are seeing developing. Our circuit is increasing the bidding end. I think our understanding of our Brakpan circuit is improving as we go along.

And these numbers are pretty much in accordance with expectations based on forecast looking at volumes and also looking at acreage going into the plant. Recoveries have been very consistent now for quite some time. So you'll see on that slide that our gold production, compared to the third quarter last year is up 3%. Our revenue is up nicely to just over ZAR0.5 billion rand.

Operating profit is trending in the right direction. Our focus is cash and cash flows, cash operating costs, that's in real terms up 3% -- or in dollar terms rather, 3% to just over $1,100 per ounce. That is also very much in line with what we're targeting. And then we are also pleased that our headline earning is around 17% to ZAR0.14 for the percent -- ZAR0.14 per share for the quarter. And that obviously supports the undertakings and the expectations that we tracked around dividend yield and also the targeted dividend yield of between 4% and 5% for the financial year.

The longer term trends are equally encouraging. For the nine months, we saw a 7% increase in gold production, just over 110,000 ounces. That puts us nicely on track towards our targeted production of between 140,000 and 145,000 ounces for the year.

Gold revenue is nicely up because of high gold price and improvement in gold production. Cash operating profits also just higher than ZAR0.5 billion to ZAR581 million -- or ZAR583.1 million, rather. And cash operating costs pretty flat, cash operating cost per unit. That's because cash is not up much -- costs, rather, are not up by much, but production was. So you have a bit of a dilution effect that offsets your inflationary pressures.

And then headline earnings encouragingly up 51% to just under ZAR0.60 per share. I think the consensus view or the target that's out there on the sell-side is just over ZAR0.65 and we do seem to be trending quite comfortably in that direction as well.

So being a Company that is increasingly positioning itself as a dividend yield, margin-oriented Company and these trends are certainly supportive of that philosophy and that strategic approach.

In moving on to the next slide, you see the picture there of our Brakpan plant slide number 4. And then straight into the trends, there you could see how the volume delivery into plant has trended over the last four quarters.

We're encouraged by the fact that on average, on the whole, volume trends are steadying. We want to achieve between a 55,000 tons and 60,000 tons a day into our plants. Obviously, in terms of the 60,000 than 55,000, but on average including the interruptions for maintenance and sometimes there's non-scheduled maintenance.

So this is very much within the engineering capacity of our delivery infrastructure and the fact that with the exception of the previous quarter which was a really good one, this one is the second best.

I think we take comfort from that, and it does seem as though the steps that we had taken, especially around August, September of last year, to have a dedicated team around volume delivery, a regime around managing integrity of the pipeline and leaks -- managing leaks, start-up procedures and so forth, versus certainly having the desired effect. And you would see a relatively steady performance around volume.

Yield is slightly down. You could see that the difference between the previous quarter's yield and this quarter's yield, you'll find in the third decimal, and that of course also had the effect that we -- combined with a slacking of volumes that the gold production quarter on quarter is slightly lower. Acreage was a little bit lower this quarter, but we mined the ore body as we find it.

We have a specific mine works program and we very deliberately mined in a very consistent pattern. So we've done this a bit on high grades. For the gold price where it is, we're in a position to mine the ore body and, as I said earlier, in a very consistent pattern.

And even in the tailings dam, you have [side force] or trending depending on what the initial deposition patents of residues looked like on the tailings dam. Here at the penstock, you'll find more of your finds in high grade. So as you move your walls further and further, you are moving across high grades and then slightly into lower grades and then back across into high grade.

Encouraging, yes, I think over the years, we've also found that the deeper you go into the dam the higher the grades become. Volumes taper down somewhat slightly though in those circumstance because the geography changes little bit. But on the whole, these grade patterns and acreage patterns are not inconsistent with what we've experienced in the past.

Moving then onto the production numbers itself or the production change itself, that is slide number 7, there you could see that also quarter on quarter or comparative quarter on quarter the trend was slightly up. On the whole, I think this cycle is relatively predictable and as flat as we want it to be.

We're looking forward, obviously, and we'll talk a little bit more about that further into the presentation and the effects of that authorization and fine-grind circuit will have, also with regards to the optimal exploitation of our reserves. But these trends are not inconsistent with what I think our metallurgies is telling us.

Right, so the very next slide, slide number 8, gives you an indication of where we are progress wise on our flotation and fine-grind project. Just to remind those listening to this presentation, you'll recall that we decided to build the -- or to refurbish the floatation circuit, our flotation circuit Ergo, and install these fine-grind molds, after we'd established that just on 37% of the gold that does not respond to our metallurgical process is gold that is encapsulated in high attraction pyrites.

In the past, we didn't have technology to drive those pyrites down or the technology to float it up but there's not much in things to trade or concentrate unless you can do something with it. And we believe that the fine-grind technology will assist us and do just that. By floating up the pyrites, high-attraction pyrites, we can put these -- this flow or this mass pool through the fine-grind circuit. We can grind it drown somewhat, those gold particles become visible or soluble, in response to cyanide gets dissolved and we do believe that we could see quite a significant improvement in extraction efficiency by bringing previously inert gold also into our production cycle.

So we're pleased with where we are with regards to development of this project. Certain sections of the project have been water commissioned and I encourage you to talk to our engineers who are there in Johannesburg and ask them about that. We're very excited about the progress and we're looking forward to seeing this thing in full flight towards August and September.

You could see that the remaining CapEx for the project is also fairly -- I wouldn't call it negligible but it represents a number that is well within our capacity, well within our means, if you look at our cash and cash equivalents that Craig will take you through later on. And we can see this project up without really having to dip into funds that we've set aside for our shareholders around the expectations for dividends that we've created.

Of course, once this project is over, we do think that strategic capital or project capital will be moderated quite substantially so we might be able to open up a bit of daylight margin wise also once this thing is up and running. So going into the new financial year, there are two things that we are encouraged by are, first, the fact that hopefully we'll see a better recovery efficiencies in this as a consequence slight increase in gold production with a not too significant increase in costs, and the opening of some margin brought about by a moderation in strategic CapEx.

And I'll hand back to Craig now to take you through the pre-production and financial performance trends.

Okay. Thanks, Niel. Just on the Group trends, I've got some graphs. You would be familiar with these graphs from previous quarters. I have changed the format slightly. You'll see that on the gold bars, it's fiscal 2012 and the black bars are fiscal 2013. And then in the first three graphs, you've got the quarter by quarter, quarter one, two, and three and then the numbers year to date.

So I think it's quite good to put it that way because you can see the trending quarter on quarter and you can also see where we are year to date. So our current operating margin is sitting at 35%, is slightly down from the previous year's 37% and you can also see the core Q3 or the third quarter margin would've also been impacted by the drop in production quarter on quarter, that was at 33%. But still, overall healthy margins for our business at around 35% on average for the year to date.

The EBITDA or our earnings before income, tax, depreciation and amortization, you can see the trending quarter on quarter for each quarter. It has been up for the first three quarters and therefore for the year to date, it is also up to ZAR401.3 million for the nine months ended 31 March 2013. And that's obviously as a result, as Niel has mentioned, to higher production year on year, the higher gold price year on year being the major contributors towards that.

Then on the headline earnings per share, similarly you'll see the same trends each quarter on the previous quarter or on the quarter in the previous year is up and likely and similarly also for year-to-date numbers, up to ZAR0.59 as for the nine months compared to ZAR0.39 in the previous year.

Free cash flow, okay, on the free cash flow you wouldn't see the same trend because firstly to explain, so if you just look at the year-to-date number, it is down on the previous year. The previous year's number would've included, I think was around about ZAR80 million which we had repaid from Blyvoor on its intercompany loan, up to the -- I think it was the December 2011 quarter which would be in the previous year's numbers.

In addition to that, there has been a lot more environmental expenditure in the current year which would have impacted those cash flows. But still very healthy free cash flow margins. And also to mention the CapEx obviously that we're spending on the floatation and fine-grind circuit in this year.

Okay, on the income statement, I want to highlight a few numbers, the revenue number. You can see that that's 16%. Obviously that was the higher gold price and also higher gold production compared to the March 2012 quarter which would have impacted that. Costs are up 22% year on year and a large chunk of that would have been brought about by the fact that we're delivering more tons to our plants and that obviously has an impact on costs. And then the other impact would be annual price increases specifically driven by electricity prices and wage price increases and those would've put pressure on the cost numbers that you see there.

We still ended up with operating profit up 5% on the March 2012 quarter. Depreciation, as I've mentioned before, you would expect to be higher because of the capital expenditure, the increased capital expenditure on infrastructure, specifically for the pipeline -- the completion of the Crown pipeline and also the floatation and fine-grind circuit.

In net finance income just to mention, just before the profit before tax line, that was up because of a dividend we received from Rand Refinery in which we hold just over 10%. So that would have been in that ZAR13.3 million. And that leaves us with profit before tax up 20% on the March 2012 quarter to ZAR93.3 million. Profit after tax was up 41% and as we've mentioned previously, headline earnings up 40 -- sorry 17% to ZAR0.14 per share.

A couple of things on the balance sheet, which always get asked in non-current investments, is our investment in Village which is approximately ZAR91 million of that number. The most of the balances made up our shares in Rand Refinery.

On the cash and cash equivalent number, ZAR70 million of that or approximately ZAR70 million is restricted cash. You can see that our cash and cash equivalents did go up, even though we've hand out significant dividends in the last quarter, and also with the capital spend on the floatation and fine-grind circuit.

Under long-term liabilities, I'll just mention there that our total borrowings on our balance sheet is ZAR165 million. So the long-term portion of that would be under long-term liabilities and I think there's about ZAR20 million or just over I think ZAR24 million sitting under current liabilities, which is repayable -- that's the first portion of the loan notes that are repayable in the first quarter of 2014. (Inaudible), is that correct?

Yes.

And, yes, so you can see our liquidity is still pretty good. Our current ratio sitting at 2.5 which is a pretty good current ratio.

And I'm going to hand you back to Niel in London to go through the reminder of the presentation, thanks.

Thanks, Craig. So moving on to slide 16, in Zimbabwe we have not packaged our portfolio as of today in such a way that one could position it [for to sell]. We've appointed advisors also to assist us for that and we've had discussions with a number of parties who are interested in this kind of asset. I think as we say on the presentation itself, the assets that we discovering there are underground type assets and not the surface type assets that I think we had hoped to find there when we initially set up for Zimbabwe.

We are in discussion with entities who own surface ducts and looking at technologies around the potential recycling also on those surface ducts but these are very early stage discussions. As and when we get to the stage where we put anything on paper, then I tell you we would make the necessary disclosures and issued the necessary releases in that regard.

The same applies also to the disposal of ERPM, the case in chief project that we capitalized by the way of small plant and which we've combined with the exploration or extension 1 and 2 exportation assets and hoping to dispose of that as well. Formal process in that regard is also been ongoing now for the last few months.

And we're hoping to have something in place by the end of this financial year. Insofar as the rest of other opportunities concerned, I think we are at this stage primarily focused, number one priority, to get our fine-grind and floatation up and running, and everything else takes second place or second in priority to getting that circuit up and running.

Moving on to the next slide, slide number 17, the Looking Ahead slide, I think you can see in the trend slides around volume and around grade and recovery the sensitivity of our circuit. We do believe that we have through this model managed to set something up. Business update avoids many of the risks typically associated with underground mining. It's not a risk-free environment though, not by any stretch of the imagination. Our risks have now become more assembly lined, factory-process type risks. We know what they are and we know what the things are that we need to pay close attention to.

The business doesn't run itself. We need to still very carefully manage the bulk delivery tons into the plant. Volume delivery is absolutely essential especially on the scale that we're doing it now. It's absolutely essential that we manage recovery efficiency. It's absolutely essential that we manage the delivery of engineering projects and the technical specifications of those engineering projects. Because once it's there it's there and there's not much room for change after that.

So we will keep a very, very keen eye on delivering into the technical design specifications of especially the flotation and the fine-grind circuit going into next few weeks.

Zimbabwe, we want to clean that up nicely and see if we can position it in such a way that the money that we spent in Zimbabwe over the last three years which is just over ZAR40 million that that is not lost, if we get some value after that. Same applies to the ERPM, we think we've packaged this quite nicely, that asset that is previously -- currently not receiving any value recognition from the market, that that is unlocked in some way or another without increasing risk, the risk that we moved away from, we won't have exposure to that again.

And then, of course, around some of the issues, environmental issues, Craig spoke about higher environmental spend in the last year. We want to be seen to play a proactive and supportive role in the whole issue of AMD that mentioned in previous presentations that we have made substantial infrastructure available or placed it at the disposal of government's agent, the TCTA.

They're going to be using some of our infrastructure to access underground water, AMD. They'll be using some of our pipeline infrastructure to pump their slurry and they'll be depositing some of their slurry onto our tailings there. So we just believe that we are playing a proactive and supportive role in addressing this issue.

But it's not entirely without benefit to (Inaudible) into our operations because by making sure that we deliver properly into this and assist rather support with this initiative, one of our key risks, namely water supply into our circuit, are certainly addressed and I think one of our sustainable development objectives that we've set for ourselves, to not compete with the consumers of potable water over the next three years, place ourselves in a position where we can move completely away from potable water and look at alternative sources of water delivery that that brings us closer to that as well.

In addition to that, we've also received permission from the Department of Water Affairs to introduce drain water, sewage water into our circuits. So from a sustainable development perspective, which is one of our key strategic look-ahead features, I think those two initiatives are certainly going to play a big role for us to deliver substantially into those objectives as well.

We do want to extend our EBDA footprint. EBDA, you will recall, is our training college. I think as a percentage of total revenue, very few companies spend as much on this initiative, this type of initiatives and what we do. We started doing that independently as the undertakings that we give them are social and labor plan but increasingly we are bringing those closer than closer.

We've had several thousand bodies through EBDA externally and we'll set some of our internal people. Presently, I take a personal interest in the programs that we've established there for school children around maths and science. We've extended that now to also include accountancy classes and basically what it means is that we have teachers on our payroll on a fulltime basis offer extra classes to school children from the surrounding areas and the impact that that has had on the pass rates of maths and science, the metric pass rates, I think has being very, very impressive. We're very pleased with that.

Maths and science is the sort of thing that equips you for tertiary education. Accountancy though is something that you can actually use after school straightaway. It's a skill that you can apply within business community. And that's why I'm very excited about the fact that we're also introducing the accountancy classes to those meticulous from this year onwards.

And that's an initiative that we want to extend, we want to roll that out. So EBDA, from a corporate social investment perspective and from contributing into human capital, it's one of the key components of sustainable development. It's certainly a project that I find to be dynamic and to be of high integrity.

Our employees remain very much focused. Key focus point, we've been through a number of different initiatives to get access into underutilized intellectual capacity or intellectual capacity within our employees, our laborers, one of our operators I'll imagine, increasingly being more of a mechanized business.

The Think campaign I thought kicked off well, to encourage people to bring the intellect into to the workplace as well to bring their mind power not only the muscle power. That's been extended by the Best Life initiative, we spoke about that earlier as well, that's being launched completely now. A DVD has been done with in-house movie stars who've played in this, little DVD that was made with real life scenarios.

And the first topic, the first objective there is to achieve a certain level of financial setting. We want people to understand the implications of cash loans or short-term loans. We want them to understand the issue around [garnishing] orders, specifically focused on garnishing orders to see if we could get our employees liberated from those. And I'm pleased to say that we had less than 40 of those and we're testing the legal power of those garnishing orders too.

In addition to that, obviously we want them develop personally in their careers. The opportunities are being provided through EBDA and internally through proper mentoring and coaching. Also courses that we encourage our employees to take, we want to push that straight into family life, look around the issues of accommodation. I think that a person who arrives at work and who doesn't have these other personnel stress issues that he has to deal with or that she has to deal with is going to be a more productive employee.

So we are investing in that. We are looking very, very keenly at finding opportunities in that regard too, and increasingly greet an environment or create an environment where our employees are content, where they believe that they can live up to their personal and professional dreams and where we also provide some opportunities for them to deliver into the expectations of the next generation. I do believe that that is the essence of true empowerment on a broad base.

So those things will be receiving a lot of our attention and then, of course, we also want to produce little bit of gold along the way and maybe pay a nice dividend to our shareholders. Those will be the key focus areas for us in the months going ahead.

That concludes the presentation, formal part of the presentation. We'd be happy to take your questions and I'll stay online until after we've concluded the session. Thank you very much for attending.

Adrian Hammond, BNP Cadiz. I've got couple of questions for Craig and Niel. Just firstly for Craig, can you give us an indication of your [stay-in-business] capital once everything is normalized post the ultra fine-grind project? And I'll follow on with a next question after this.

Okay, we're going through a budgeting process now to have a look at our next year's capital spend. I know Niel has provided guidance previously to the market on that number and we're going to be trying to get as close to that. I think it was close to $50 an ounce. We'd be trying to get as close to that as possible but I mean I think for this next year, we're definitely going to be seeing a significant drop in our capital from what we -- I think we spent, I mean we budgeted this year around about ZAR340 million just over and I think we'll see a substantial decrease in that number probably less to around 50% of that number, less than 50% here in the next year.

Thanks. And then just I think just touching on what Niel was saying, moving to dividends and you've got the cash on the balance sheet, you've got some Village shares, CapEx spend as you say is coming down, business is cash generative. Other than potential increase in dividends as you alluded to, what are your plans to do with that cash? What are your -- what's beyond ultra fine-grinding for the business?

Do you want me to respond to that, Craig? I think one of the regions --

Sorry -- sorry Niel, I think Adrian's directing that question to you Niel, sorry.

Oh, okay all right.

If possible.

No, that's fine. I'm happy to take this one. I think the reason why we -- the saving on CapEx is only a very moderate 50%, maybe a little bit more than 50% in the year going ahead is that we've never spent any serious money on research and development. We've appointed some dedicated people to do -- in our steps to working and so forth and to come up with what I think is a very good solution around fine-grind and flotation.

But going forward, we are certainly going to spend a little bit more money on external expertise towards research and development, maybe one or two laboratories to assist us, just to do a bit of analysis around what others that we can do in addition to our current metallurgical process to improve gold recovery. Even off the fine-grind and flotation and fine-grind, we'll still be putting almost half of the gold that goes into our plants back on to the tailings dam.

And the technology to get that I think is out there. We just need to go and find it and we need to align it with the ultra volume environment in which we find ourselves.

Also with regards, I think there's always the question of growth, further growth. Our business is essentially only seven years old, maybe even younger. Although it's the oldest listing in Johannesburg and although it stands on either side of mineral exploitation, both the underground cycle which started more than 110-120 years ago and the recycling of tailings now, Ergo in its current format and the consolidated portfolio of assets that we now have is really the result, the end result of the process that's started just over six years ago and we've spent a lot of capital over that period of time.

And the business looks different form a risk perspective, the business certainly looks different from the financial model, substantially different, and the people that we employ at different skills than what you'd find in the mining industry, so there've been a lot of things that have happened and that that have transformed this business into something completely different. The only thing that I don't think has happened to the extent that we wanted to happen is the value flow through to shareholders.

I do think that this model promises more to shareholders and as a consequence I think what we want to do in the foreseeable future -- when I say foreseeable future, I'm talking about say two-three years from now -- is allow for the model to settle in, allow for the integrity of the model to become increasingly visible, and affect the register of our institutional shareholder base. It moved from just over 20% 18-20 months ago to more than 50% in the recent months. And we want to work at that, we want to make sure that we get more of the longer term fundamental analysis type shareholders onto the register.

Based on the model, not on the promise of some [current] initiative or finding a resource or some other story, we want them to come on board because of the integrity and the attractiveness of this current model. And we'll do that I think by delivering into the expectations that we've created around risk profile of the business and the yield capacity of the business and offering a solid return on investment. And I think increasingly as that register changes and that's become one of my principle duties as an employee of the Company is to reach out and to find those investors to share the model, to share the upside associated with the model and trade issues around the register.

Hopefully in two or three years from now, we'll increasingly find that there would be something resembling a shareholder mandate as to where the next step is going to be. Not going to be risking our laurels because I think I mentioned earlier that business doesn't manage itself, so we'll continually work at continuous business improvement technologies, continuous business improvement practices, along with all the other sustainable development issues because I do think that serious investors insist or require that the companies that they invest in take those things seriously and that is high upon the list of priorities.

But I think this seven-year-old business will now settle in and optimize its current circuits while seeing better research and development and address issues around the register and become a serious business that's taken seriously by serious investors.

Thanks.

Can you check if there are any questions on the conference call?

Hi. This is the operator. There's no questions on the conference call.

There is one question from the webcast. It's a question from (inaudible). What projects are you looking to complete after the fine-grinding project is completed and where will CapEx fall to?

Fine-grind is the last of the major strategic investments that we'll be making for quite some time. We are continuing to open up a bit of daylight between the revenue line and the watering cost line as a consequence, and we're not planning any major projects at this point in time.

As I said earlier, we want the business to settle in and for the model to prove itself.

Are there any questions from the audience from Johannesburg?

Julie Bain from Miningmx. Just a quick one, in terms of investing more in your R&D, will you just think you'll be developing novel ways of releasing the gold from the dumps and will you be able to sale that intellectual property in time?

I'm going to be retaining the very clever people that I spoke about earlier to also find me the question -- give you answer to that question, I just don't know. But we may have to think out of the box a bit technology wise. Technology has improved so much or is changed so much over the last few years just on such a large scale there. I don't really know what that technology is going to look like, but maybe it's nanotechnology, maybe it's some sort of laser optical technology, I've no idea. I think the scope is wide open.

Okay, thank you. And one last one, in Zimbabwe where you're basically selling off the stake -- you plan to sale off the stake you have there, you said that you hope to kind of by sell it -- by recycling some dumps up there that you would make up the capital expenditure that you -- the exploration expenditure that you had invested up there. Is that right, did I interpret that correctly?

I think what I said was -- what I meant to say was that we would want to do a transaction that makes sure that the ZAR40 million odd that we spent on Zimbabwe is not -- does not impact, doesn't evaporate and we want to do a transaction that would give us at least that plus whatever value we think we may have created by identifying these ore bodies, that that is recognized.

And would that involve processing dumps in Zimbabwe?

No, no, the processing dumps in Zimbabwe is something that we think we might do either on our own or in collaboration with whomever is willing work with us, but that's not part of the transaction. The transaction that we're looking at now is a disposal or to settle that would realize what we spent plus some more. Whereas the treatments of dumps is something that we would look at and I think probably only after we've seen exactly what the fine-grind technology offers, what it may open up for us.

So we do have this technology and we could potentially work on this. Maybe you'll want us to come and treat your dumps and we'll come and pick something up and then you can give us a percentage of the gold production or the answer is something to that.

But you know as I say -- as I said earlier, as and when it becomes more tangible, as and when it becomes something that requires disclosure or any kind of announcement, then we'll do that. At this stage, it's very much conceptual. We know that the equipment is out there, we know that a lot of those dumps are of a refractory in nature, your normal (inaudible) without anything else hasn't really been effective in treating those. Maybe fine-grind does it, we'll see. We'll do the test work and see. If it works, then we'll take in there.

Thank you.

Just a follow up if I may. Just on the dump side (inaudible), can you just give us some more detail on tonnage or grade?

Not really now. It's early days.

Okay. Niel, I think that's probably it. James, do we have a video or anything?

No.

No video. Okay, thanks very much for attending, ladies and gentlemen, and please help yourselves to some drinks and some eats outside. Thank you, bye-bye.