DRDGOLD Ltd (DRD) 2014 Q3 法說會逐字稿

Good morning, everybody. Thank you very much for taking the time to come and listen to our quarterly presentation. It's nice to see the familiar faces here; and also, welcome to the new ones.

We issued a guidance statement earlier, after we decided to suspend the high grade fine-grind circuit, and we gave some indication as to what we thought the numbers were going to look like. So we -- I'll, basically, just amplifying on that; and then also give you some context as to why we took the steps that we did, and what the plans are for the immediate future, and medium and longer term, insofar as our new technology is concerned.

Please just take cognizance of our disclaimer, the wording of our disclaimer, because we do make some statements, which may amount to forward-looking statements. Just treat that with the necessary caution.

So the key features, or the highlights, are fairly succinct this quarter. You'll see that we only went with three bullets. We refer to the gold production over nine months. Obviously, the gold production in the last quarter was pretty dreadful, and we'll deal with that in the next slide.

Also, the all-in sustaining cost trend, which has become the measure, I think, in the industry to gauge the health of a company. So how much cash flows does it generate?

And then, also just a reflection on the cash balance. You'll see on some of the earlier slides, or slides setting out the cash flow balance over time, that we have been in a negative cash flow trend now for quite some time with the final capital expenditure on the construction of the flotation and fine-grind circuit.

We managed to reverse that in this last quarter, notwithstanding the fact that we had significantly reduced revenues and costs that were about ZAR25 million higher quarter on quarter, total all-in costs. But we had a favorable working capital swing, I believe. And then also, the reduced CapEx all contributed towards a healthier cash balance quarter on quarter.

So this is probably the thing that I'll talk about most, because that's the one bit of good news that we're bringing to this presentation.

But we've got these slides one slide, or the trend slides on one slide, just to give you an indication as to where things went right, and where things didn't go right. Now, you'll that on the volume side we're pretty much on par with the average over the last few quarters, with the exception of those two outliers there. So volume certainly wasn't the issue this quarter.

This is, obviously, not a happy trend, the fact that the recovered grades, or yield, came down as much as it did. I'll spend quite a bit of time talking about that later in the presentation, to give you some context in that regard.

Of course, these are directly related. Lower yield results in what has probably one of our lowest gold production quarters in many, many years, coming out of these circuits, for the reasons that I'll elaborate on later in the presentation.

The financial indicators, there you can see a fairly steep reduction in the cash operating margin. Fortunately, we still had a cash operating margin. All-in sustaining margin was negative, though.

EBITDA, slightly positive, ZAR16 million. That's an important number, because that determines the cover ratio for some of the notes that we have in place. And it's important that we manage the business in such a way that, that doesn't drop to below the cover ratio.

It's 2 times interest cover that we've got to maintain, about ZAR4 million per quarter, I think. So we've got to make at least ZAR8 million per quarter in order not to fall foul of that, until June. And then, after that it's quite a lot lower because then the outstanding debt's only about ZAR80 million.

And then the free cash flow, we're happy about the number. If I just look at those, that was a spectacular quarter one year ago; and this one also wasn't too bad, either.

If you look further down in the presentation when we talk to the income statement, you'll see that revenues one year ago were, in fact, ZAR100 million higher quarter on quarter, which is an indication both of the drop in gold price -- a drop in gold production, rather, but also the changes that we've seen in our price environment.

And then headline earnings are also negative, minus ZAR0.07 per share; down from ZAR0.14 one year ago.

So these are anything but happy trends. And it's because of what we were witnessing here that we took the decisions that we took with regards the timeout on the flotation and fine grind, and that we're implementing the measures that we're currently implementing. Because these are the numbers that we are comfortable with.

And I think these are the numbers that the investor community became accustomed to, certainly the expectations that we created into that market. And I think that's why, maybe one year ago, our share price was roughly twice what it is at this point in time. It's all about performance. If these numbers look good, share price looks good.

Here you can see the comparatives, quarter on quarter and year on year. And there's the ZAR100 million that I'm talking about. So that's the extent to which the reduced production has impacted just on the amount of money that we've got.

And if you then also look onto the next slide, to the -- to that number there, the decline of ZAR200 million in the cash balance, we did arrest it, and we did push it back up again. But it very much talks to that number there, and that number there; that's really where the difference has come in; also in comparing net profit and operating profit quarter on quarter, and comparative period over comparative period.

We are pleased, though, that we are still in a position to report a net profit after tax, and that we still have positive EBITDA. I think that is because the first two months weren't too bad. It was really a fairly steep slide in the third month of the quarter that have caused these numbers to trend as aggressively negative as they did.

Looking at the balance sheet, I think that is an important indicator of the financial status, or the financial health of the business; the fact that we're still maintaining a current ratio of 1.6 times.

So it's certainly a business, I think, worth throwing efforts, and resources, and dedication towards. Because it is by no stretch of the imagination, in a crisis it just finds itself in a position where the next step didn't happen and needs to happen after we had just looked at everything carefully, and from the right vantage point.

But this is certainly not where we want to be. We wanted to be doing our victory lap at this stage; telling you about how successful our fine grind and floatation circuit is, and how a robust platform that was going to be for us moving forward.

At the moment, what we have to do instead of doing that victory lap and waving to the crowd is dealing with reality. And hopefully we'll do it well enough so that the confidence in our model and the confidence in the team's ability to mine this resource optimally is restored.

So let's talk a little bit about everything that went wrong this quarter, and why we find ourselves in the predicament that we are in.

Now you know that about one year ago we started construction on the next phase of our business. We call ourselves a technology-driven business now. We use technology to take stuff that other people have thrown away; we process it and we make profits, and we give those profits to our various stakeholders.

Now, in order to continue to do that and exploit the full extent of our reserve, or rather of our resource, 11 million ounces, we had to make some changes. The fact of the matter is that over time the gold price had outpaced the rising costs, but that trend has very much reversed now. Costs are catching up with the gold price.

We do have fairly steep industry inflation in South Africa, because most of our costs, in our environment at least, relate to power, relate to water, relate to reagents. Reagents are mostly import -- not imported, but they are import-parity priced. So if there's a drop in the value of our currency then there is an increase in our costs, which is disproportionately higher than your normal [CPI] (inaudible) numbers locally.

In order to address the issue of diminishing grades over time, and address the issue of shrinking margin over time, it became important for us -- became essential for us to introduce something that would take the same product and enhance its value. So the same amount of material coming into the plant would give us higher revenues, and higher gold production.

Without that, DRDGOLD is essentially in the first stage of a slow decay, or prolonged closure, without the technology upgrade. Because the diminishing grades and the higher costs will ultimately catch up with the revenue line.

And instead of having a 15 or a 20-year life, we're faced with a 5 or a 6 year life, the last few years of which are probably not (technical difficulty). Involve a consolidation of everything that we need to clean up behind ourselves; all the sites that we were on; the environmental impacts; the community impacts; and so forth, and so forth.

So this is something that we did last year; not only because we wanted to, but because we had to, it became essential in order to fully exploit the resource under our control.

We built a float circuit, or we refurbished a float circuit, that has the capacity to receive our entire run of mine, 1.8 million tonnes a month. And we also built some high grade rather fine-grind mills, which was going to break the pyrites that were floated out, break it down until all the little gold particles that were encapsulated into those chunks of pyrites have been liberated, and they become soluble, and they could respond to our normal metallurgical process.

In the commissioning process, what we saw that worked to design specification were, in, fact the float circuit efficiency. We managed to create the concentrate that we wanted to create; slightly higher recovery than what was initially planned, or anticipated. So the float circuit works.

And the mills also work. The mills managed to grind down, after a few initial hiccups, where it was really making milkshake, as opposed to milling these pyrites. The mill started working and it started breaking down these particles to the required fracture.

And looking at the worst residue values, that's the value of gold, the gold content on the solids that leave the plant at the end of this entire process, at the back end, looking at the trending in the worst residue values, this float circuit and these mills achieved exactly what we set out to achieve; namely, to liberate an additional 0.03 gram of gold per tonne of material entering the plant.

That was the target, an additional 1.8 kilos of gold a day; an additional 30 particles per billion. That is what we targeted. That was what was going to be broken up and released and introduced into the metallurgical process.

So the tough part, the hard part, the unknown part, that worked really well and gave us the desired result.

Where things became problematic is that integrating this material, both the float tail, and also the high grade tail, materials coming out of the high grade circuit, integrating that into the remainder of the plant, into the lower grade CIL turned out to be hugely problematic. And that was for a variety of reasons.

Firstly, the availability of our thickeners turned out to be very problematic. And that was exacerbated by the fact that we had an enormous amount of rain right in the middle of the commissioning process. The rain uninterrupted for almost three weeks; solid raining 4 o'clock every morning, stopped raining 10 o'clock every evening, and it did so for three weeks, uninterrupted.

That rain ended up on our tailings dam, on our reclamation sites. That water was carried into our plants. And you can only do one thing with it; it's got to go into the plant, and through the processor, and from there it's got to go into the tailings dam.

That water impacted, obviously, significantly on the densities of the material entering the plant. We have to manipulate these densities to different levels for different stages of the process. It's got to be slightly lower density in order for the float cells to work properly. It's got be slightly higher density in order for the CIL process to work properly, or else your carbon particles don't float, they just sink to the bottom of the tank.

Now managing that water balance, dealing with the excessive water entering the plant, maintaining proper densities, that turned out to be a big, big challenge; one which we were not able to master fully.

Now we estimated, and we subsequently measured, that the water in circuit ends up containing roughly 0.02 gram of gold per 1,000 liters, per tonne. And if you can't keep that in circuit, if you hit some sort of a bottleneck because of an interruption in your process flow, that water then leaves the plant.

And during that period, in particular, the three-week period during which we had all those rains, a lot of water ended up in the overflows, and ended up exiting the plant and not staying in circuit. So a lot of gold bearing water, we believe, left the plant during that stage.

Of course, for the first time ever, we also introduced technology, or a component in the circuit, that was truly vulnerable to the reliable supply of electricity.

In the past, if there's electrical trip out then the pump switches off and you just manage to start up again. But if it's not more than an hour or two, then you can basically start your whole circuit up again. And the interruption was only that; the period of time during which there was no electricity supply.

Now, for the first time, we've got a component that if the electricity trips, I'm talking about the thickeners in particular, all your solids sink to the bottom and your rakes have difficulty stirring this whole lot; it starts torquing, and then the thickener trips. That's a thing with an extremely long arm and an extremely wide moment, and there's a lot of torque happening within that whole setup, in that whole operation.

If it torques, it trips, or else you burn out the motor; it's sort of a fail-safe process that's built in there.

And the problem is if this thing trips then you don't have just some hour or two of interruption; you've got a week interruption, because you've got to drain the damn thing, and then you've got to fill it back up again.

And now you've got a stop start, stop start process. And when you're chasing 30 parts out of a billion, stop start, stop start and low density, high density, switch this off, switch that on, and trying to maneuver this whole thing, it just doesn't work. It gets really, really messy.

So the water balance, the availability of thickeners, and how we managed our way around all of those things turn out to be hugely problematic. And we came to the conclusion that this thing we're not going to sort while we're in mid air. We've still got to land this plane before we start changing, or reconfiguring, the wings. We're not going to do that in flight.

Second problem that we experienced was carbon efficiencies. And we experienced this at two places; firstly in the high grade, where we though initially there was a [ prig robber] in the solution portion, because this is a CIP circuit, it's not a CIL circuit. And activated carbon was introduced there. I think that, to an extent, maybe caused an imbalance in just how much carbon was moving through the pumps cells; the leaching in the first instance, and then the pump cells secondly.

There was 3.5 tonnes of carbon moving in and out of this circuit at a rate which I think we didn't quite master properly. And that was certainly not as fluent, or as rhythmic, is maybe the right word, as this type of arrangement requires. And that's because we had to do something that this thing wasn't designed for.

Activated carbon has no place in a leach tank, not if you run a CIP circuit. And then maybe there were some changes that needed to be done there. But, once again, if you're running full tilt, 1.6 million tonnes per month, and things are coming at you from every direction, you're not going to fix that in midstream, or in mid flight.

We also have carbon efficiency issues in the low grade circuit, the conventional CIL circuit. And what you've got to keep in mind, and what we found, was that quite a lot of the gold that presented in the low grade circuit was, in fact, tracked and captured into the high grade solution. Because remember, not all the gold is attached to pyrite was gold that initially found its way in and then found its way out again; some of that gold was soluble.

The flotation cell doesn't discriminate. If it's a piece of pyrite, whether or not the gold is sitting on top or sitting inside, that pyrite's ending up in the concentrate. So a lot of the CIL lower grade gold that reacted to our metallurgical process was, in fact, trapped into this concentrate and found its way into the high grade circuit.

That high grade tail was very high in value, and that gold was then supposed to find its way on to carbon in the low grade circuit. And we just never saw the efficiencies that we called for. The efficiencies there were equally low.

And then there were a number of carbon management issues. We found out afterwards that the kilns were running at a too-low temperature.

And also, the washing of the carbon is a process through which the calcium on the carbon is washed off with acid. But that process had not been recalibrated, or reconfigured, to produce the desired results.

In other words, you had problem, upon problem, upon problem; coupled with inefficiency, and another inefficiency. As I said earlier, you talk about 30 parts per billion that you are pursuing, these little efficiencies, or inefficiencies, add up and before you know it it's just a mess. And you can't fix it without just taking a step back, calling timeout, and starting all over again. And I spoke about the thickeners.

The two things that we don't quite know yet, which we'll investigate during this period of timeout and investigation, the one thing is the full extent to which the reagents, float reagents, impact on carbon efficiency. Because these reagents are organic. It's like an oil, and there could be a coating effect or a fouling effect on carbon. And we will test that separately to see exactly the extent to which we can expect a dilution of carbon efficiency because of the float reagents.

And we also don't know the extent to which the high grade section impacts on overall recovery, because we couldn't measure exactly how much gold stayed behind in high grade, how much gold on carbon entered the lower grade. We don't fully know, 100%, just the extent to which the efficiency of the high grade, and especially the float, the creation of the float concentrate, could have had an impact on the carbon efficiency in the lower grade.

So the things that we're going to be doing -- Francois just pointed out to me that we did make a loss after tax, not a profit after tax. But I'm sure you all picked that up.

The action measures going forward, the first thing that we did was, if you find yourself in a state of relative disarray, not knowing what you expect and where to expect it from, and if you see your forecast for the month being adjusted every week, and being adjusted in the wrong direction, unfortunately, then clearly you've got to create a situation where you have solid ground under your feet, sooner rather than later. Just go back to steady state so that you know what you can rely on, what you can bank on, what you can take to the bank into the next operating period.

Now keep in mind that although we've got ZAR200 million in the bank, we've got some commitments that we've got to meet in the not-too-distant future. The one is a ZAR21 million rehabilitation guarantee that we've got to pay; and there's about ZAR70-million-odd that we have to pay in July.

Now that is money that we cannot touch, because it's due when it's due, and it's got to be paid when it's paid. And you cannot just blindly, based on blind faith and hope, run this process until such time as it sorts itself out. Not if you're burning cash at the rate of ZAR10 million or ZAR15 million per month.

So we decided well let's stop this thing. Let's go back to what we know. Let's get some solid ground under our feet; stabilize the low grade circuit; see exactly what it is that we can get out of the end. If I talk about the low grade circuit, I'm talking about everything that was there before we built the flotation and the fine grind.

Let's go back to that and just see how much gold can we produce. Where does it settle down? Where does it stabilize? See what the cost profile then looks like in order to produce the number of kilos that this process is yielding, and then reconfigure whatever needs to be reconfigured in order to make sure that the revenue line stays above the all-in cost line. And then start over again.

We are sourcing some high grade materials into the City Deep plant. It could have, during this period, an important, not significant, but still a significant in numbers, but important in considering which period of time we find ourselves in, or phase we find ourselves in. It could top up the production by, maybe, 10 kilos, 15 kilos; maybe even 20 kilos, if we manage to get the volume throughput that we're looking for. So that's gold that wasn't called for in the existing circuits, but that can top it up a little bit.

And during this period, obviously, we will look very closely at the water management regime that we've got to make sure that everything stays in closed circuit. It involves creating some reservoir space. There's a fourth thickener that's not being used of vast capacity. If we run into difficulties and we've got to do something with overflows, that's going to go into that fourth thickener.

We also want to make sure that the thickeners themselves are no longer as vulnerable to trip outs and surges, as they were during this period that we ran them. That basically just means that we've got to bring in supplementary power, or auxiliary power rather, so that those motors can run, and that the pumps can run, and just keep the mix in motion, and that it doesn't settle down.

So the [rigs] will continue, and the material will be circulated through the thickeners to just keep this whole thing in suspension. That's the engineering upgrade that we're talking about.

Carbon efficiencies: we will measure, literally, every component. We do measurements on various stages of the process. But in starting up the high grade circuit, in starting up the float circuit and the fine-grind mills, we'll initially only run one-third of its entire capacity. Both the float tail, and also the high grade tail, will go into separate CIL tanks. And there we will test exactly what the effect is of both the float circuit, the float cells, as well as the metallurgical process in the high grade CIP on extraction efficiencies.

So this answer here, or this question here, will be answered. The extent to which the high grade section impacts on the overall recovery, the full extent of the impact of float reagents on recoveries; that we'll find out because test work will take place in an isolated circuit.

And then, of course, all these carbon inefficiencies that we had, the kilns that didn't work properly, the acid wash that wasn't optimally calibrated, those have, in fact, been addressed. And we will just make sure that the short interval management protocols that have been implemented to manage those into the future, those will be done as well.

Now what I don't mention here, but what is also happening as we speak, is, clearly, if you're only going to be producing so much gold, and you've allowed some [fat] to creep into the structure, some redundancy to creep into the structure, maybe to deliver into other things that are not directly associated with the production of gold, these things are going to be looked in as well, quite carefully.

We're looking, for example, at the curricula of our training college and whether it really needs to be as big and extensive as it currently is. Do we need 50 people, or do we need fewer people? Do we need to offer six engineering courses, or would one or two engineering courses suffice? These are things that we will look into over the next few weeks.

We've already considerably reduced the size of the corporate footprint. Francois, after he took over, reduced the costs of the finance department by 20%. I think he's only still 10% off target; I think I said 30%. But he significantly reduced that. And he's established a management regime, in terms of which there is line of sight management from his office straight into the operation, with very little duplication, and he will continue to develop that process. And he's working very closely and with the full support of Mark Burrell, the FD of Ergo.

So there's a nice dynamic happening there as well. That will happen with the rest of the corporate infrastructure, as well. We're a one-operation entity, at this point in time.

A few years ago when you were listening to this presentation, you were listening to results coming out of Blyvoor, out of ERPM, and out of several different operating areas. That's no longer the case. We've got one business. It's Ergo, with some auxiliary plants, some smaller plants scattered around there.

That's going to change now -- or that has change. As a consequence, the requirement, or the necessity, to have this separate corporate office far away from the operations, it's become unnecessary.

We can now integrate, to a large extent, the functions of the corporate office with the operational office. Our Chief Operating Officer, and DRD's version of Trevor Manual. What is your portfolio, Jaco? Business Development Officer already at Ergo. That's where they work from. They no longer have offices at the corporate office. And, ultimately, all of us will find out way -- or all the functions that are currently still being performed at the corporate office, will find its way into Ergo.

So, I think, there will be another step change. There was a step change about six years ago when we dropped our corporate cost from ZAR120 million to ZAR60 million in a year. And we did that just with the reorganizing of expenditure, and traveling, and planning, and so forth, and so forth. And it's also after the business had shrunk quite a bit, after we had sold off to Emperor.

Now we're in another phase where there's going to be that step change, where we can, fairly significantly, reduce the size of the administrative portion of the business. Make sure that those who are there are focused mainly on the business of producing gold, and the costs that are incurred, are incurred within the context of predominantly the business of producing gold; and then, all the controls and governance issues, and so forth, that are associated with that.

So I think I've covered the stuff that we want to do, the action measures.

Just on timing, one of the reasons, I think, why we had run at the speed that we did -- I know why we ran at the speed. But I think one of the contributing factors of the fact that we had brought a degree of instability into the operations of this plant, the extent that we did, was because of the speed with which we wanted to implement.

Now, the flotation and fine-grind plant add about ZAR7 a tonne to the monthly overheads, about ZAR14 million, or just under ZAR14 million, give or take. And you want to make sure that you produce enough gold to cover that additional ZAR14 million before you enter your winter tariff phase, which starts now, and which adds about another ZAR7 million to ZAR8 million to the monthly costs.

So you can't be still commissioning plants and paying this overhead and not making enough money to cover that overhead and then just have this additional top up cost of ZAR6 million to ZAR7 million. This thing's got to be up and running, and paying its own way, and making a contribution by the time that we get into this very expensive part of the year.

The reason why we called timeout now, and a very important driver in the timing of re-commissioning and doing the test work, is this period of winter tariffs. We can't afford to run this thing, and we can't afford to dilute gold production out of the low grade circuit, while we've got to pay this additional ZAR6 million or ZAR7 million a month in electricity costs.

So the test work that I talk about here, the engineering work will happen. We're putting in the under flow pumps, and we're putting in the de-silting valves for the float cells, etc., etc. All of those things are going to happen; stuff that we've got to do in order to make sure that our carbon management protocols and regimes are in place. Those things are happening, as we speak.

We'll probably start draining and refurbishing the fourth thickener within the next few weeks as well, and also doing some upgrades on the existing second bank of CIL tanks to be able to receive the float and the high grade tail into those tanks and have adequate capacity. But we're not going to start spending money on the day-to-day running costs of a float circuit and of fine-grind mills until after winter tariffs are behind us.

And we're also not going to dilute gold production. Because remember, the moment that you start channeling a portion of your runner mine into these float banks there is an immediate lock up of gold for a period of time until such time as it's, basically, saturated that circuit and the gold comes out the other day. And it could be a few weeks, it could be more than a few weeks. We'll know when we know.

But you can't run the risk of diluting that gold production while you've got this overhead, this disproportionately high overhead, because you've got to cover these electricity costs.

So those two important considerations will determine -- or have determined that -- or guided our thinking in the test work and the re-commissioning, to the extent that these things will happen, and the re-testing will happen in September, start happening in September. We will test for at least three months. Only one-third of the total runner mine enters the float circuit and is treated separately on the second line of CIL tanks.

And we will fix the level of confidence on these things that we don't know; impact of the reagents, impact of the high grade circuit. We will peg the level of confidence before we pull the trigger and reintegrate the high grade into the low grade, at a very high level of confidence. Because what we've established, and I think what we've known all along, is that you can't really simulate this process.

If 60% of the upside that you're pursuing is, in conventional terms, deemed to be within range of acceptable assay error then no hypothesis, or test work, or little laboratory test is going to give you an adequately accurate indication of what it is that you can expect once you fire this thing back up again.

This business, because of the nature of what it is, and I think it's fairly pioneering in its nature, you will know once you know. So you're looking, really, at a massive research facility, where a very strict protocol of how we're going to (inaudible) that, and how we're going to reintroduce it, the sequence into which we will reintroduce it, and the decision [tree], depending on the kind of results that we get out of this as we go along, is going to be very, very conservative.

So, if we're talking timelines, September is when we'll start test work. Three months is how long the test work will take. If we're confident that we've achieved the levels of confidence that we set upfront then we will reintegrate. And that is a process that will take a few months to settle down, again.

So, hopefully, by Christmas, we'll be able to buy ourselves a nice little congratulatory Christmas present because this thing is working as well as it's supposed to.

We're not rushing into anything. We want to make sure that at the sacrifice, maybe, or at the cost, maybe, of next quarter's results, and the quarter thereafter results, and the December results, that we can still show up here in two or three or five years from now and have good results.

So we're working towards a five-, and a 10-, and a 15-year horizon here. We are certainly not working towards a three-month, or a six-month, or a nine-month horizon.

And maybe from an investor perspective, or from a trader perspective, rather, maybe that's not exactly the sort of message that brings comfort or confidence to traders, but that's the business of a business. And it's going to take as long as it's going to take. And the next step that we will take will be a confident step, based on empirical evidence, and no rush jobs.

I thought that it's also, since this has become so topical, was I just spend a little bit of time on what is now increasingly being required of businesses. Because we had a fairly dreadful quarter from a financial yield perspective, and financial capital perspective; sort of your traditional financial bottom line, or single bottom line perspective.

But I think for some time now we haven't been living in a single bottom-line environment any more. We live in a triple bottom-line environment, where we not only have to create financial value, or financial capital, but we also have to create social value, and environment value.

DRDGOLD, with the luxury of the cash flows that we enjoyed up until recent, has fully brought this on board. The whole concept of sustainable development and the implementation of sustainable development gold through a process of what Mervyn King calls integrated thinking, has, to a large, extent dictated our strategic thinking. That's the reason why this technology upgrade was decided upon.

And if we didn't do the technology upgrade we would be ZAR250 million up, and maybe have had a slightly better production month, maybe ZAR300 million. And we've got to the please the market to no end with just how spectacularly successful we are; only to tell them in three or four years that we're entering a phase of structured closure.

But the technology upgrade was necessary because the business as you see it now places a heavy burden on available natural resources, and is extremely volume-driven, or volume-sensitive. You've got to deliver the tonnes. If you don't deliver the tonnes, you don't see the results. That's the first requirement.

And the more tonnes you produce, the more water you consume. We top up our water circuit every day by 30 million liters. Most of it we draw from natural environment, but some of that's got to come from Rand Water as well.

And, of course, to move 2 million tonnes, or 1.8 million tonnes a month, you consume an enormous amount of power, and it's also very volume-sensitive. So you've got to run at peak the whole time, not pretty much in the way of headroom or margin, when it comes to times when you really have to cut back a little bit on volume.

So the technology upgrade that we decided to implement was driven not only towards optimal exploitation of our resource and our ore body. But it's also driven very much against the reality and the backdrop of our natural resource availability reality and the availability of power in the long-term.

I've drawn up this little thing; it's not scientific at all. The accountants and the engineers who work with square blocks and debit and credit columns that always have to balance they might be a little bit outraged by just how inaccurate this is. But this more of an interpretation of where I think we are, compared to where I think we want be, insofar as our sustainable development goals are concerned.

I'll start with the environmental capital side. Environmental capital is something that a business that operates in the middle of one of the largest cities in Africa simply has to take seriously. You cannot allow water to just run off your working areas and into natural streams. You cannot allow dust, dust in particular, to simply just be blown off your tailings dams and into the surrounding areas.

Now we have spent, because this is something that we feel very serious about, in the last five years, up until 2013, on average, [ZAR80 million] per year on the rehabilitation and the vegetation of dumps. And I can tell you what, it shows.

We've had some fairly strong winds blowing in and around Joburg in the last few days, and I've been to Ergo in the last month probably more than I went to Ergo in the three years before that. So I drove past those Crown tailings almost every day and I can tell you that I've witnessed that hardly any visible dust is blown off the Crown complex.

And if you look at some of those sidewalls that have been -- or the site slopes, rather, that have been vegetated, that is top of the range stuff. There's not a speck of sand visible of the original dam against those side slopes. And ultimately, provided that we can achieve financial outcomes that we set for ourselves, that entire dam, or that entire complex can look like that.

The environmental capital requirement which assures long-term sustainability also requires that we go about our consumption of natural resources in a responsible way.

We've already reduced our consumption of Rand Water Board by about 10%. Our purpose and our goal for the next year, and I've spoken about this in the past, is to introduce gray water from sewage farms into our circuit, and to exclude far more of the Rand Water Board consumption than what we currently do. And also, to not have to draw from natural streams and natural reservoirs that we've built, because those are also going to be diminished over time as we maybe enter a dry cycle, again.

I think that is an important consideration because we would then -- we would not be competing with the rest of society for the usage of natural water. And water which is slightly controversial when it's introduced into the natural environment, because it is gray, water. It isn't treated maybe exactly to the standard that we want it to; that has been brought into our circuit, where it is being consumed.

We spend a lot of time also on the social capital side. Social capital is something that we specifically decided upon about four years ago, when this Company's share price also flat lined and we said, you know what, if we're not going to be offering anything to our shareholders maybe we should be looking at, at least, somebody who can benefit and find purpose in what we do, or we find purpose in what we do for the people around us.

So we entered, or we embarked upon a very robust program targeting specifically the surrounding communities in and around the areas where we operate. And one of the key focus areas, and I won't go through the entire social capital program, was the schooling of schoolchildren on the math and science side.

I can tell you that we are now supporting five or six schools, six schools, where we deploy a math teacher, a science teacher, and an accountancy teacher. And just to give you some of the results, at Langaville, for example, talking about matric results last year, Langaville's pass rate in science has gone from 27% to 70%. On math, it's gone up from 53% to 70%.

There's another school called Tlakula; science up from 53% to 70%; math from 56% to 58%. Tsakane, up from 61% to 75%, that's science; math, up 61% to 70%.

These are young kids that in the past, sitting in class, going through their lectures and not passing. In other words, basically hitting a stone wall even before their professional lives started. I think that is real social capital, and is something that we will continue to do and that will have a space in the way that we budget our costs, going forward.

Another important aspect, another very important program that we are involved in, is just adjacent to one of our reclamation sites. Communities being complaining of respiratory problems, and it was especially the elderly and the younger people who complained of that. Initially, the allegation was, or the suspicion was, that this was dust related. But those problems have been there even before we started reclaiming that particular site.

To cut a long story short, we saw that many of them were using wooden coal fires to cook, and also for heating. And there's a gas program that Barry de Blocq's running with, a gas stove program that's now being rolled with a gas shack; [it's more] local economic development project, a little business that's been established. And I think 500, or so, stoves have already been distributed into that community. So healthy cooking, and a healthy environment.

I think that's the sort of social capital that we, operating there, where the most disenfranchised live, that's the social capital that one, hopefully, one day will add real value into this particular stock.

On the human capital side, our approach is very much to, in line with the fact that we are considering ourselves to be a technology Company, establish a knowledge-based labor force. We want our people to bring their intellect to work, and to apply their intellect in going about their daily tasks, their daily work.

We don't want people to just use muscle power to move stuff around. Because the value of muscle power, and what companies are able to pay for muscle power, that gap has become disproportionately wide.

The value of muscle power in South Africa no longer attracts a living wage. If I get paid for moving chairs around, the value of moving chairs around is not ZAR12,500 a month; it's maybe ZAR2,000 a month. That's the economic value add that you make by just moving stuff around.

So we want people to become knowledge-based. We've got a very stable labor force. The week before last we did the 25-year long service awards. 10% of our labor force showed up and qualified for it. Over time, it's up to 10%. In two years from now we'll have another, I think, 40-odd-% that will qualify for that.

So these are guys that have been there since Charles Simmons was there, when he started the business, when he started Crown Mines. They've been part of his team for decades, four decades -- sorry 2.5 decades. Sorry, Charles. 2.5 decades they've been part of his team, and they're still there. And I tell you what, you look at them and you know that you want this guy to be around for another 20 years, because he's worth every penny that you pay him in salary every month.

We are encouraging our employees and we're establishing resources and infrastructure to develop to their full capacity. We refer to it as best life.

Best life is to reach the highest level in your profession; go for those classes, go for the additional training, for the skills training, the opportunities are there. Go for the financial literacy classes; we workshop those to make sure people don't take irresponsible debt. And work towards retirement so that the day when you finish your work here at Ergo Mining, and Crown, and DRD that you don't walk into the abyss of social dependence, that you have something in place.

On the manufactured and intellectual capital, our technology I spoke about earlier; that the technology is geared towards our environmental and resource reality. And the intellectual capital that we deploy is equally geared towards that. We want this to be something that you can license out to other commodities in other businesses.

And then, of course, the financial capital. I left this for last because I think this is where it begins, and this is where it ends.

You can have all of these other capitals. You can have the social capital, the environmental, the human, manufactured, and intellectual and you're still not a business. It doesn't make you a business, it gives you -- Afrikaans word is the better word, and you'll excuse me for using it, it gives you bestaansrecht.

If you've got proper social capital and proper environmental capital and human capital development then you've got bestaansrecht, you've got legitimacy. You're allowed to go around and do the things that you do and generate an income the way that you do, if you're delivering to that. But if that is all you have then you're not a business; you're a society, or you're a campaign, or you're a movement, or you're an NGO.

In order to be a business, you need to make money. You need to add value. There's got to be a financial capital component in that. And that is where in the last quarter we certainly haven't been delivering into the reasonable expectations, the legitimate or justifiable expectations of our stakeholders, because of the hiccups that we've incurred, and mainly self-inflicted hiccups.

I do have a green bar there. Because I think we can justifiably give ourselves half a green bar because we've got the governance systems in place to catch this thing in time, to stop the cash burn in time, and to retain sufficient financial integrity to fix what needs fixing and still develop the business into the future.

I think we've got both the components of being a business from financial capital. But we also have the legitimacy and bestaansrecht to continue to do business, gauged against all the other capitals that have become part of our reality.

The magic of sustainable development lies in the ability to overlap these things so that your social capital initiatives are also deliver into the financial bottom line. Financial capital is what makes you a business; social capital is what gives you legitimacy.

Environmental capital is probably what makes you sustainable in the long term and that makes sure that in 50 years from now we're not walking around with UV filters and oxygen masks, that we can still do business the way that we're doing it now.

But if you can find the overlap then you've nailed it. Then you understand the essence of what sustainable development is all about.

Procter & Gamble discovered this almost by accident. One of their social capital initiatives was to encourage people, from a personal hygiene perspective, to wash their hands. All of a sudden, they were selling more soap, so the financial bottom line benefited.

I choose to believe that the programs that we're implementing, especially on the manufactured and intellectual side, are programs that have compelling value-add components on the environmental capital side, whilst at the same time delivering into the financial bottom line. Because we'll be able to mine fewer tonnes, in other words spend less power; a smaller carbon footprint, in proportion to the total number of ounces that we produce through the technology that we've got, without spending more money.

We'll be able to consume less water, place a lesser burden on the environment, on environmental capital, and yet still yield a similar, if not better, result, because it's going to be cheaper.

What did costs come down, Jaco, from ZAR6 per [cube] to ZAR1.50? To ZAR2. That's a -- what is that? Somebody who's clever with numbers work out. But that's a lot. That's the essence. That's the beauty of intelligent and well thought through sustainable development.

Maybe to summarize and to just reiterate, I think we qualify as a business because there's a compelling financial capital proposition in the long term. I think we've got the manufactured and intellectual capital to sustain the business and to optimally exploit our resource in the long term. And I think we've got legitimacy. We've got bestaansrecht because of the initiatives on the social, environmental, and human capital side.

So it's back into the -- it's back to basics. It's become, once again, a very honest approach to our reality, what we've got to do. But I think we've got the team to do that, and they've certainly been given the room, the space to do what needs to be done. They've been given the reassurance that time is on their side, because we are taking a conservative approach.

And, hopefully, we can progressively report back into the market the progress that we've made, that we are making, and the verifications that we are seeing.

Right, so that's it. A mouthful. But thank you, nonetheless, for not falling asleep, or throwing old fruit at me. Adrian?

Adrian Hammond, BNP Cadiz. I have four questions. One, firstly for Francois, just quickly on what's the additional CapEx you need to do the engineering upgrades that needs to be spent there?

We're still busy working all of that out. But it should relieve a bit of the costs associated with the fine grind there, and that should be sufficient to cover most of it.

ZAR2 million per month?

Yes.

We're leaving ZAR2 million per month on the table. So we didn't slash away all of the ZAR14 million in total cost; we're leaving behind ZAR2 million a month for the engineering upgrades.

Okay, thanks. And I have three questions for you, Niel. Firstly, it appears to me that with or without the fine grind you have an uphill battle with rising unit costs on a rand per tonne and dollar per ounce basis. What more do you think you can do on the costs side to keep this business, really, I think we're talking about sustainable here?

You've gone through all these pillars of capital here, and obviously the most concerning one is the environmental one. As you continue mining your provision will continue to rise, so what's left on the cost side that you can explore? That's the first question.

Secondly, with regards to your intention to buy out your minorities, could you just give us an update on that? And what's the implication for you reaching your 2014 BEE charter requirements?

And then lastly, as I understand, they are pumping AMD now at ERPM by -- through the TCTA. What is your commercial agreement with them -- for them, using your -- that part of -- that lease area there? Is there any upside for you there?

Certainly. I want to start with the last one first, maybe. It's something that I should have mentioned in my discussion of the environmental capital component, and that is also our contribution into treating this increasing environmental threat, or risk, of Acid Mine Drainage.

Our arrangement with the TCTA is that they can lease from us the shaft infrastructure, where they've submerged their pumps; and also the land on which they've built their pumping infrastructure -- rather, their plant infrastructure.

And then, they can also introduce, at a predetermined rate, at an agreed rate which has already been fixed, their slurry into our residue deposition lines. And for that they pay us the actual cost of dealing with that, and they continue to bear the environmental risks associated with the substances that they put onto our tailing stems.

Insofar as the usage of our facilities are concerned, we didn't charge them a market-related price for the usage of the shaft, for actually gaining access into the infrastructure, and also for the rest.

We also didn't charge them a market-related cost in linking up into our deposition infrastructure and the -- having access to the deposition facility. But we've created a, let's call it, future contingent credit of about ZAR250 million, against which we can offset, until after we've determined the actual amount, any future directive for contributions towards capital, and costs, and so forth, and so forth.

So we will have an income stream in respect of the slurry that they deposit onto our tailings. And if there's any suggestion in future of having to make such -- any kind of contribution there'll be a ZAR250 million offset claim that we can bring against that.

In addition to that, we also have the right to buy up to 30 megs of treated water from them per day at the actual cost of treating the water, so, in other words, of that net cost, as and when we want to.

So if the sewerage water becomes insufficient then we can top that up with their water. Their water is the one that we are least excited about, because it does contain high quantities of lime. So there's going to be a scaling problem, so we want to avoid that water. But it's a fallback situation for us. And then, obviously, you could do something to maybe diminish the impact of that lime.

On the BEE side, the -- we've posted the circular this week. I think that's where we are with that. We've posted the circular, and we're finalizing the Section 102 submission to the minister. We need to get a consent.

One of the conditions for the transaction is that the minister consents to the transaction in terms of Section 102 of the MPRDA. That consent is what will ensure continued BEE compliance. If the consent's not given, based on the terms contained in the consent; because remember, the BEE levels are discretionary levels determined by the minister in terms of a statutory authority that she has. And she publishes certain levels, but she has a discretion around those levels.

And on a look-through basis, and, in particular, if you can show that there's a link between the equity holder and the holding company, and the -- and what 26% is within the subsidiary company, and then those are, more often than not, accepted as adequate. But the 102 consent is what will ensure continued BEE compliance.

And then on the cost side, I think one of the things that we've done, because of the, let's call it, accelerated expenditure on the likes of environmental management expenses, by way of an example, means that we -- I think, we've rushed ahead a little bit and just how much is necessary in order to contain the effects of our current environment footprint.

In that regard, we're not doing any proactive spending at this stage. We are pretty much just holding and maintaining the existing environmental improvements that we've made. And there's quite a significant saving in that regard.

Now, that is not something that you will do indefinitely. Because if you drive past some of the other side slopes of the Crown tailings, you'll see that instead of lush vegetation there's netting. The netting is a temporary measure. It works very well, but it's not a permanent solution. You've got to get the vegetation in.

So at some point or another, we will have to recommence with the vegetation of the side slopes in particular. But that won't happen now, but that's some cost coming out of the actual [equation].

And then, of course, the process that I spoke about around the consolidation of the corporate footprint and the operational footprint, reconfiguring the likes of the EBDA facility, the training facility.

You know, you add all of those things up.

Henry Gouws, who runs Ergo, said to me the other day: you know, we're not going to save ZAR10 million on one single thing. We're going to save 100,000 thing -- ZAR100,000 100 times; that's how we're going to get to that number. And let's focus on that. That will take us where we need to be.

I do think, and I do believe, that there's adequate margin in the operations if we look at our costs in that way. We've got a very interesting little tool that we apply, where we take just total costs, all-in costs, every last cent that we've got to spend, and we look at different variables on gold price and gold production.

That seems to indicate that we could keep this thing going the way that we have, and have some margin, some flexibility, until such time as we reintroduce this. And that's why the reintroduction and the test work has not been done with the haste that we were working earlier. We're doing at a more measured pace, to make sure that we've got the necessary verifications.

Thanks. Just to come quickly back to minorities, how certain are you of getting this consent, 102, through? And this is quite pivotal. Because in my mind, if it does, it means that the term once empower always empowered holds. What do you think?

Not really, no. Look, I think the -- if I look at the new codes that have recently been published, it looks as though the compromise position on the once empowered always [empowerment] concept is one in terms of which you're entitled to claim BEE credits for as long as you held them before you -- before there was an exit.

So let's say you had -- you [weren't] BEE-compliant for five years, and there's a sale, then you would be able to claim those credits for five years. I think that's where -- I think that's the mindset. That's what the new codes, the generic codes, seem to suggest.

We're not relying on a once empowered always empowered concept. What we're saying is to the minister: we want to do this deal. In terms of this deal, we've translated 26% of value into a percentage in a holding company, and we believe that this is the number of shares that that amounts to. Give us the consent to do the deal on that basis, and stipulate that compliance with the code, and with the charter, and the terms of our license, the conditions of our license will be assured, provided that we always maintain that number of shares, that holding.

If she says, yes, then there's a deal. If she says, no, then there is no deal. There is no Plan B if we don't get the consent; and there won't be a roll up.

Brendan Ryan, Business Day. Two questions, please. The first, on the timing of the work you now have to do, am I correct in assuming that, best case, you'll have your free-float grind and high grade circuit kicking in from the March quarter next year?

I saw you were working it out, and you obviously did that with reference to the times that I mentioned. Yes, we'll start testing in September. We will test for at least three months, until we've verified everything, and then we'll reintroduce. So, yes, it's September (inaudible).

So you've, effectively, lost a year?

Basically, a year.

Okay. And then second question: I cast my mind back three months ago, to when we were last here. You gave a very upbeat presentation. You know, the grade was rising; the new plant was working; things were looking great. And then six weeks later the roof falls in. Did you have no inkling at that stage of what was coming down the track?

It's -- I can maybe take you back even a month or two before that when I was buying shares. And I spent quite a lot of money buying shares at ZAR6.25; that's how upbeat I was, and how confident I was that we were on the right track.

Brendan, the failure that we saw is not a failure of the technology. It was a failure of the integration of the process into the high grade circuit. It's a metallurgical issue that we've got to deal with; it is not an engineering or a technology issue.

And that we didn't foresee. We did not foresee the impact that in commissioning this in the middle of the worst rainstorm in so many years was going to have just on densities, these power interruptions; the bottlenecks as a consequence of these thickeners tripping, and so forth. So it's a combination of those things. And I think we just found ourselves in the worst possible situation during a very intense period of commissioning.

But the [moles] worked, and the flotation circuit worked. And that we all very much consider, still consider, to be the difficult part. The rest is tweaking. It's reconfiguring your metallurgical protocols and configuration.

Thanks.

[Luren Gwinnie], RMB Morgan Stanley. Could you maybe give us an indication of the expected volumes and the yield that you'll have between now out of your conventional low grade circuit until the higher grades of the [grinding].

We're obviously targeting the same levels of production that we saw before we switched this thing on, so that is the target number.

But there have been some changes. We are phasing out the Cason dump, and the 406 dump, which is also a sand dump, is going to come into the equation; and then there's also some of the high grade material's going into City.

At this stage, the only estimates that I make on gold production is the one that I give seconds after I receive the production sheets of the morning smelt; they're all after the fact. And on that, we base the costs for the next foreseeable week, or two weeks, or month.

What I can say, though, is that we did see a 21% swing in gold production between March and April. So the CIL circuit is behaving; it's behaving the way that it used to.

There are two questions [here].

Certainly. Two questions, please. The first question is what is the long-term growth plan, as Ergo has a life span? Ergo is running at pretty much full capacity. So when we talk about growth within the context of Ergo, we don't talk about growth in production, we talk about extending the life of Ergo.

The additional 15% recovery efficiency is what is going to unlock a fairly substantial portion of our resources, and extend that life for as long as the gold price and the technologies are mutually supportive. Off that footprint also, often improved recovery profile, we can definitely extend the existing footprint a little bit, both towards the east and towards the west.

And we are in constant discussions with parties who have interests on either side of our footprint to see whether there is a prospect of bringing some of their materials into our plants. But that's got to happen at the higher recoveries. And that, too, won't grow the business; it will extend the life of the business.

And then there's also there's -- considering the Company's reserves, and the Company only has an 11--year life remaining. Is this accurate? I think it's actually less than that.

In the absence of the plant coming online this year, assuming it never comes online, we will probably start a five- or a six-year closure phase, basically. It'll run at current levels, but a lot of the excitement then I think would be over.

Land available for resale: can you clarify the extent of land ownership DRDGOLD has? Could this land become available for sale? And has a resale valuation been done on the land?

Yes, we are selling non-core chunks of land as we go along. I think we've got at the moment offers of about, what, it's ZAR35 million, [Hannes]? For -- about ZAR40 million, yes, for land? But we don't create any expectation around resale value.

As and when the Elsburg facility has been mined out, which is about eight years from now, there's roughly 300 hectares that will be available for sale. I think the market at the time will determine what it's worth. So we're not doing any resale valuations.

Before we do a sale, we do, do an independent valuation, and we don't sell for less. How much did we generate in property sales last year?

About 40.

About ZAR40 million? Yes, okay. And we've got about ZAR40 million of pending offers, as well. Okay. I think I answered them all?

Yes.

All right. Thank you very much, everybody.