DRDGOLD Ltd (DRD) 2013 Q2 法說會逐字稿

Good morning, everybody. Thank you very much for taking the time to come and listen to our interim and quarterly report for the last six months and three months respectively. It's the first one that Francois will be attending with me. I'm hoping that you've written down a whole set of very complicated financial questions that you could pose to him afterwards; he's burning to get stuck into the thick of things.

Our disclaimer is the normal disclaimer. We do have a number of assumptions based upon which we will be talking. So if you'll just take due regard of those.

So we lead with the key features for the two quarters, the two successive quarters. The reason being that we are in the process of commissioning our new fine-grind and flotation circuits. And I think the trends, at this stage, tell the story of how we've been doing in getting this put in place.

So we're leading with the gold production quarter on quarter, the flotation, fine-grind, gold production; that's, in fact, the bar that was smelted. It's a fairly decent one of just over 20 kilos after three days of production, exclusively coming out of the fine grind, and also using the fine grind's elution circuit. So we now have a very definite high-grade and low-grade section in our plant.

And also, see what's been happening with the operating costs quarter on quarter, and also the operating profit. As we get deeper into the presentation though, you will see that these numbers are still pretty much lagging the numbers of the previous financial year.

So these numbers are off a low base. It's really our recovery from the previous quarter hopefully -- encouragingly trending in the right direction, but still a long way away from where we are targeting production, and especially profit.

We're only easing into the commissioning phase of this plant now. And I think there's still a lot of work to be done, notwithstanding the fact that we are encouraged with the results that we've been seeing.

So just looking at the trend itself, and this is obviously over the last six quarters, you can see that the volume trend is more or less back to where it was -- the volume trend is more or less where it was prior to the previous quarter, and this seems to be well within reach now. We've been hitting the 60,000 tonne-odd per day regularly now, which is our target. We've exceeded it a few times. So we do have a bit of search capacity for maintenance and so forth in between.

What you can also -- these numbers especially on the last quarter, for the last five days, six days, of the quarter, the last five days, six days of the calendar year, just after Christmas and before New Year, we had several interruptions as a consequence of electricity cuts. There was a full trip-out at one stage at the plant.

So these volume numbers over here are actually quite pleasing, because they managed to absorb fairly significant impact on volume towards the end of the calendar year, towards the end of December.

Yield you can see is up quite nicely. There was a little bit of higher grade materials coming into the plant. But we've also had, on and off -- up until the full commissioning of the flotation circuit, the three banks of the flotation circuit, we've had, on and off, some access into the flotation banks; if it wasn't one-third, then it was two-thirds.

And, obviously, that gave us the benefit of some of the flotation material coming through, some of the concentrate coming through, and going through the mills, and impacting on grade.

Production, you can see, is more or less where it was the fourth quarter and the quarter just before that, it's a fairly flat index this, but not where it was in the first quarter and the second quarter of the previous financial year.

And the reason why we built this new plant, the reason why we built these molds, is so that we can consistently start achieving numbers round about there, just under the -- between the 1,150 kilos and the 1,200 kilos per quarter. That was what this thing was designed to do. And while we're seeing a slight increase, or a trending back to where it was, prior to the first quarter of commissioning, we do believe that we're still some ways off.

So looking at the financial indicators, now here you can see really the impact of the delay in our commissioning, and also the slightly lower gold price. On the whole -- and that's what I was talking about earlier when I said that this quarter's numbers are off a fairly low base, on the whole you could see that this was really the second-worst quarter now that we've had measured against the last six quarters.

This was very much a recovery quarter, one where the trends needed to go back in the right direction, and not the one where we were going to have the full benefit, or see the full benefit, of our new technology. So we're hoping, and we're looking forward, to increasingly start seeing the benefit of the high recovery efficiency of the plant and getting ourselves back to a more decent operating margin.

Obviously, the gold price was also quite a bit higher -- lower, rather, in the last two quarters than what we saw over the previous financial year. I think, on average, we only got about ZAR413, or thereabout, per kilo of gold. It's significantly higher today. And that obviously should also have a good impact on margin.

All-in sustaining costs margin, margins back to about 9%, but still lagging behind where we were. And I think what we started to come to expect out of these operations is that we can maintain and all-in sustaining margin that's in double digits. That's certainly what we're aiming to achieve going forward. The 520% (sic - see slide 10 "521%") improvement from the previous quarter is really nonsensical looked at in the bigger picture.

EBITDA trended up nicely again. But, once again, only halfway up where it needs to be looked at against the previous quarters.

Free cash flow, I think we're reaching the stage now where this trend could be reversed. We've come to the end of the expensive part of this business. The costs that have been capitalized have been capitalized. The big capital expenditure in infrastructure, that's been spent. So going forward there's no reason why we shouldn't see a reversal of this trend.

Headline earnings per cent -- headline earnings per share, rather, expressed in cent, we moved back from a headline loss, back to I think total headline earnings were about ZAR900,000, just under ZAR1 million. So if you divide that by 400 million and it ends up -- it equals nothing. So headline earnings is ZAR0.00, and we need to get it back to, I think, more or less those levels there. So we could deliver on the expectation that we create, in the market, of being a dividend paying company.

So I think here we could see how stark the difference was between the two half-years. We certainly had, and this is where the production numbers, in particular, play a significant role, the combination of higher production, almost 200 kilos, or just over 200 kilos more, over the half-year, and also the gold price.

See the difference there, about a ZAR42,000 per kilo, on a ton, that's ZAR40 million of gold and that's the production per quarter over two quarters. That's an ZAR80 million swing just on average gold price received. So you take your 200 kilos drop, and you take that ZAR80 million swing, based on production over the last six months, and I think that gives you an indication as to why the cash position, at the end of this [financial] -- half-year is certainly not in line with what we saw in the previous financial year.

So, all of these numbers, compared to the previous half-year, are significantly down; operating profit, operating margin, all-in sustaining cost margin, EBITDA.

And here we had a handsome earning -- earnings, or headline earnings of ZAR170 million, as opposed to a headline loss of just under ZAR12 million; ZAR0.45 compared to minus ZAR0.03 half-year on half-year.

So, I think we've got our work cut out for ourselves. I think the market's been patient. We have been giving guidance as to when and how we thought that these various sections would kick in to effect.

It's not all gold price. A lot of that is production, and it's a simple matter of making sure that we could get the production numbers where they need to be.

The fixed cost component of this business is such that by just extracting more gold without seeing much of a variation in costs, you could swing these around pretty quickly and pretty handsomely.

So it's a matter of getting the technology to work, making sure that we establish equilibrium and consistency in the plant, and then you'll see, hopefully, a restoration, or a partial restoration, to some of those previous levels.

Okay, so comparing the revenue, or rather the two quarters, previous was the six months on six months; these are the two quarters. But then you can also see just on the revenue line; ZAR180 million (sic - see slide 16 "ZAR130 million") swing 2012 -- compared to 2013, and that is all gold price.

So you add the ZAR25 million-odd additional costs and you can see how the swing quarter-on-quarter is about ZAR150 million, just based on slightly higher costs, but still manageable, I think, within the circumstances considering that we are putting far more tonnes through, through different sections of the plant. So I think that is still acceptable.

But there you could see the really big impact; it's on the revenue line, and that is as a consequence an extent of slightly higher gold price previous quarter, about half of that is gold price, ZAR40 million. But then the other ZAR90 million is pretty much the impact of lower gold production, about 100 kilos less.

So, we still have an operating profit, so we're thankful for that; it trended nicely back towards that. But we ended up with a loss after tax compared to the previous year's quarter, December quarter, and then earnings per share that we can reflect.

The balance sheet; I think the number that everybody is always closely attuned to is the cash and cash equivalents. This is now first quarter 2014 to second quarter 2014. There you can see that the cash number did come down a further ZAR130 million. Part of that obviously was the dividend that we paid. That was about ZAR50 million, if I'm not mistaken. And then just over ZAR20 million on loan notes.

So the cash burn there was the difference between ZAR130 million and ZAR70 million; is about -- I think, ZAR55 million is what the graph showed earlier, that was the net cash burn quarter on quarter.

And I think we've positioned ourselves now that we can start reversing that trend. Certainly, the gold price is helping quite a lot, but I think production itself needs to start trending in the right direction, and we're seeing signs of that.

And I'll talk about some of the positive signs, where we're certainly seeing an encouraging change in trend, or emergence of new trends, and also some of the things that we are still working on, that we still need to get sorted out.

So, the current ratio I think is slightly weaker then, as a consequence of that slight drop in the current asset scenario.

So, looking ahead, stabilize the flotation/fine-grind and stabilize the carbon-in-leach.

So what we're seeing is that our high-grade section, the flotation fine-grind section, is certainly working to spec. It is performing to specifications. The assumptions that we had made when we started off with this project and the numbers that we're achieving there, I think, those assumptions are being proven accurate; certain instance may be slightly conservative.

We are getting the mass pool; we are getting the extraction efficiency of pyrites. It's ending up in the mass pool, in the concentrate.

We are seeing the percentage of gold that we thought was going to end up in the concentrate, ending up in the concentrate. It's roughly 40% of all the gold entering the plant ends up in that concentrate.

We're seeing, at this stage, not quite the grinding efficiency. We want to get size of the material coming through the mills, we want to see that down to about 21 micron/22 micron, and I think we're achieving about 25 micron at this stage.

But the size, or the fraction, of the material entering the mills is quite a bit bigger than what we initially anticipated. Our assumptions suggested 31 micron and I think it's about 37 micron. They talk about D80 which means 80% of the material entering the circuit has a size of 37-odd micron.

So, I'm told that the delta, the different between material entering the mill and the material exiting the mill that the delta is consistent with what the initial assumptions were.

We also get an extraction efficiency, carbon loading and extraction efficiency within the pump cells. That is consistent with initial assumptions after it was tweaked a little bit. They dealt with issues like a preg-robber; as a consequence they introduced oxygen and they introduced carbon earlier on in the treatment phase, etc., etc.

So we are starting to see that those extraction efficiencies are consistent with what the project assumptions were. So, the high-grade circuit is -- has trended and is performing to specification.

What now needs to be addressed, obviously, is the older part of the plant; the initial -- we refer to it as the low-grade section of the plant -- but it's just the normal CIL. That's the 11 tanks into which all of the slurry goes where cyanide's introduced, carbon's introduced, the gold dissolves, it settles or it loads onto the carbon, and from there it goes onto the elution circuit.

Now what we're seeing there is that, because of the significant amount of gold that gets captured earlier on and maybe some of that gold that previously had presented in the lower section, that the carbon-loading values, or the loaded carbon values, rather, put it the right way round, the loaded carbon values that we're seeing there are not consistent with where they were prior to the interjection of the high-grade circuit.

I think they're playing around at this stage with the number of elutions; they're playing around with how long it stays in the tanks, whether the resin's time is too long, whether it's too short, and so forth. But that is one part of the circuit where some work still needs to be done, so that we can achieve the target that we had set at the outset of the -- embarking on this project.

We want to see 60% of the gold coming out of the high-grade circuit, and we want to see 40% of the gold that we produce coming out of the low-grade circuit.

And, at this stage, the low-grade circuit is still lagging a bit, and lagging as a consequence of the fact we only fully commissioned the high-grade circuit round about January 25. So there is a bit of a lag that they're working towards and, hopefully, they'll have that sorted out over the next two or three weeks.

The technology in which we invested and in which all the capital and effort went, namely, the flotation, fine-grind, pump cell, elution, etc., that's all working well.

The technology that we refurbished, in order for the densities to be adjusted and readjusted, so that in every component of our circuit the material flow is properly prepped, or the process that it has to go through, namely the thickeners, those have been stabilized as well; they are working well. That was the reason for the late commissioning of the high-grade circuit, of the flotation cells.

We told the market that we want this thing to be steady and commissioned by the end of December. Construction work had been finalized by early December, but just getting these thickeners to run properly, that turned to be a bigger challenge that what we had anticipated. We had liners that stood up and were ruptured. We had a trip-out after one of the thickeners [over-taut], etc., etc.

So, this is the process that you go through when you commission these monstrosities. Various additional layers of complexity and each one dealt with sequentially, and hopefully adequately, so that in future we learn from each one and we do it a little bit better. But that's basically where we stand.

So, a slight recovery off a low base; certainly enough for us to become increasingly encouraged about, particularly with reference to the performance of the high-grade section of the plant. But still some work to do insofar as the lower-grade section is concerned until we get full and final stability and equilibrium between those two.

We'll keep the market up to date as we go along.

Francois and I will take your questions. Adrian? Sorry, did you put your hand up? Yes, please go ahead.

Adrian Hammond, BNP Cadiz; Niel, just three questions, if I may. Firstly, are you -- where the rand is today, are you concerned about cyanide costs?

Yes, we are. Every time that there's a -- cyanide costs, let me put it differently, and I need to make sure that I don't step on anybody's toes here.

But our cyanide price gets adjusted every time that there's a change in the exchange rate -- rand/dollar exchange rate. So it looks as though it's import parity priced, so whenever the rand weakens, we see an increase in the cyanide price. So yes, it is a concern.

Do you have any -- do you have a contract in place that offers protection to that, or --?

No. We have a supply contract, but the supplier obviously hands down -- I don't know if it's costs that they hand down, because it's a local supplier following local technologies and ingredients to produce. But every time that there's a change in the exchange rate, then obviously there's an adjustment.

Obviously, if the rand improves, then the reverse side of the coin is also true. Then we get an adjustment -- a favorable adjustment.

But yes, look, Adrian, I've always been a supporter rather of a high dollar gold price and a strong local currency, because a lot of the cost dynamics in the gold space are determined by -- are dollar-based, so to speak; your steel prices, your energy prices, your fuel prices. Eskom's borrowed dollars to -- for their capital expansion. A lot of stuff gets delivered to our operations with diesel trucks. So that gets handed down to the consumer.

There's import parity pricing, it would seem, among some of our bigger suppliers, the -- those who have captured most or a significant portion of the market.

So what I saw in 2002, I think, when we first saw a rally in the gold price based on a weaker exchange rate or a weaker rand, I think it went from ZAR70,000 or ZAR60,000 a kilo to ZAR120,000 a kilo. And it was a very good time for the mines, for the goldmines, but then costs very quickly started increasing. There was a very steep industry inflation that was a lot steeper than inflation generally.

So in our space and our industry, a weak rand is a very good lead indicator for a steep increase in the price of energy -- or energy costs for steel, and for chemicals, for reagents, more often than not.

And the lag is about -- it's about nine months. Some of them catch on earlier, obviously, they have quarterly adjustments. But I think the lag is about nine months.

Thanks. And just -- on talking to the ultra-fine-grind project, assuming everything goes according to plan, what do you think the impact on your reserves could be, assuming that you're now achieving -- well, reducing the [pain] limit, so to speak?

Look, I think at the current gold price, and assuming that we achieve the production profile that we have set out to achieve, we'll deliver entire life of mine. What we may find is that some of the lower grade dumps, in fact, also become profitable, and we could bring those in, if not to make significant profit, but just to extend the life of the mine, so that if there is a change in the gold price -- a favorable change in the gold price, that you've got your infrastructure and you can take advantage of that.

So yes, I think if we do achieve the assumptions, we could certainly maintain the yields that we've promised, the expectation that we've created with regards yield, and return on investment for the entire life of mine.

In order for it to go beyond that, we will have to see an increase in gold price. But we are more than likely -- we should be able to extend life of mine, but at a much more marginal rate.

Thank you.

All right. Anybody else? Sorry, [Brendan].

Niel, can you make any estimate or give us some guidance as to when you think this Company might become dividend paying again?

Look, Brendan, the view of the Board is that we should distribute one-third of -- which mic., this one here? Okay, sorry. So apparently, I'm not talking into the mic., my apologies.

Whenever there's free cash flow, we want to have a buffer equal to amount one month's working capital. We're not declaring a dividend this time round, because we need to maintain our buffer, and we've got loan notes to pay in June. So if we were to pay dividends now and repaid the loan note, then we'll drop to below our buffer.

So you can -- if we can maintain our buffer and we generate free cash flows, at least one-third of that is what we usually apply towards dividends. It depends on how much gold we produce and what the gold price is.

And your buffer is how much, approximately?

It's about ZAR130 million/ZAR150 million, thereabouts; about one month's working capital.

Adrian?

Just on that matter with the Village shares, have you decided what you're going to do there?

My Board gave me some guidance on one or two avenues that I should pursue, at the last Board meeting, and I intend to do that. One of them, obviously, is to look at an orderly disposal.

What we're not going to be doing is just dumping the shares. If not, the Board expects that management actually manages that investment proactively, so maybe get involved a little bit; but that, we'll have to take up with the Village people.

So is it getting involved with the Village assets?

No, not the assets, but maybe be a little bit more proactive as a shareholder; show up at the Annual General Meeting, voice an opinion into some of the strategic decision making processes, and so forth and so forth.

Thanks.

It's probably about as vague an answer as I've ever given.

That's it.

Is it? Nobody from the outside. Thank you very much, everybody, for taking the time to come and listen to us.