DRDGOLD Ltd (DRD) 2014 Q1 法說會逐字稿

Good morning, everybody. Thank you very much, it's a nice intimate crowd today, so I said to James that I will share some of my personal thoughts that I don't always share and then he pointed out that there's a podcast. So I said, well in that case, I'll ask some of my colleagues to maybe share some of their intimate thoughts. (laughter)

You're all familiar with our disclaimer. There will be a number of forward-looking statements.

It's been a good quarter for us; both year on year as well as quarter on quarter. As you can see, gold production from the last quarter is up 8%. What makes this a significant number is that the combined improvement in gold production, compared to what we achieved in the March quarter, is 20%.

In the March quarter you'll recall was when we suspended the operation of the flotation and fine-grind due to a number of metallurgical issues that we had to figure out what to do about.

Operating profit; you can see up 52%. It's slowly but surely creeping back to the numbers that we were used to when the gold price was still $1,800 an ounce.

Of course, in South Africa, with the rand having weakened significantly against the dollar, we didn't see a double-digit drop in the gold price, so it's certainly achievable. And if we can continue with current trends then hopefully we'll be in a position, at some point, to again report numbers like that, that cash margin in particular.

The next point is a significant point. The cash balance steady net of loan retirement. You will recall that we had to pay a ZAR77 million payment against the loan notes that matured at the end of July. We managed to do that. When I go through the more detailed financial analysis, you'll see that the net cash flow from operations was just over ZAR80 million this quarter.

So we almost paid the entire payment that was due with cash flows out of the operations in a single quarter. So that was a really good result for us and we're very pleased about that.

So the loan balance or the cash balance, rather, is steady above ZAR200 million, ZAR204 million. Last quarter it was ZAR208 million. So the total cash burn, inclusive of this repayment, was just on ZAR4 million, and for us that is a very good outcome.

Another one which is maybe not -- which I suppose we can't underemphasize is the fact that we managed to extend our wage settlement by another year. We are in a phase, in labor relations in South Africa, where labor has become a little volatile, unpredictable. I think there's a lot of jockeying between labors -- labor unions or jousting between labor unions as to who rules the roost.

So when we managed to extend our wage settlement for another year, which effectively makes it a three-year settlement, we were quite pleased. At least this is indicative of potentially another year of stable labor relations in our organization and we're very fortunate for that; we're very grateful for that.

The year-on-year numbers, I'm not going to spend too much time on that other than to say that on all the key indicators we are also very pleased with how it's trended. From EBITDA, all-in sustaining costs, all the way through operating profit and gold production. And what makes it significant maybe, so maybe one shouldn't just gloss over it, is the fact that this really is the first quarter where we could compare life without the flotation and the fine-grind and life with the flotation and the fine-grind.

So that's where the difference came in, quarter on quarter, if you compare this year's first quarter with last year's first quarter. I think there is some significance in those numbers.

Then insofar as the operating trends is concerned, I'm just going to step away from the podium a little bit and just emphasize some of those. See that volume was a little bit down; I think we had a bit of downtime on one of the thickeners for about a week, that impacted on that.

But you can see that the yield grade steadily improved, and the reason why this particular graph here or this particular trend is very encouraging, is the fact that this yield grade improved notwithstanding the fact that this was the quarter for lock-up.

Whenever you start up a new circuit there is going to be a phase, a few weeks, during which the various components of your circuit has to saturate; you've got to build up inventory, particularly insofar as your carbon portion of the circuit is concerned and in this instance, the CIP.

So there's probably about 20 kilos of gold locked up in the system as we speak, additional, but that you didn't really see impact on the numbers at the tail-end here. We still managed to achieve a very good yield grade and certainly trending in the right direction.

Now we measure this up into the fourth decimal; we'd be happy to round it. If we rounded it, then it will give you the 0.2, but in our ultra-volume environment with the sensitivities that we're dealing with, it's probably appropriate to rather just stick to the more conservative number, because 0.20 is our target and that does make a significant impact on all-in gold production.

This number here; that's our gold production in kilos expressed in kilos for the quarter. It's just over 37,000 ounces, 1.1 tonnes of gold -- 1.15 tonnes of gold that we've produced. It's the best that it's been in several quarters. I think if you extrapolate this further down, it's probably amongst one of the best quarters that we've had in quite some time.

Financial indicators. Very importantly, the cash operating margin is trending back up again, quite nicely, all-in sustaining margin is just on 4%. I think we just need to give some context to the difference between last quarter's all-in sustaining costs and this quarter's all-in sustaining costs.

Last quarter did benefit from an ZAR80 million reduction -- it's actually a little bit more than that; just over ZAR90 million reduction, but I think after offsets about an ZAR80 million positive charge to the income statement and that was after we had reduced provision for rehabilitation, going forward.

And it's based on just a different methodology and access to cheaper water that allowed for that. So the 4% margin is maybe not -- or the move between the previous quarter and this quarter, is maybe not an entirely accurate indication, considering the benefit of the previous quarter.

The same applies to EBITDA. If you were to normalize EBITDA and strip out that particular charge, then the EBITDA number, quarter on quarter, improved by between 55% and 60%. And then year on year, you can see also, I think, approximately an 87% move on EBITDA, which we are particularly pleased about.

This is an important number for us because this gives you an idea, maybe not of how much profit we make but how much money we make. And ultimately, it's with money that you're going to pay your wages and your consumables, etc., etc. And it's been our best quarter, also, for quite some time.

We significantly reversed the cash burn of previous quarters, those in particular. Most of the expensive CapEx is behind us. We are going to spend some additional CapEx into the next few quarters but nothing compared to that.

And we're very much in a space now where operational cash flows, net cash flows, are capable of taking care of our CapEx. This is the number here that enabled us to pay the bond without really seeing much of a dent in our cash balance.

We are comfortably above our buffer, after having provided for the dividend that's going to be paid in the next few weeks. We're comfortably above our one-month working capital buffer that we want to maintain. And nothing indicating at this stage that that buffer is under threat.

Headline earnings per share as well, there too I think a more appropriate number would be to compare quarter on quarter, it's in fact from ZAR0.14 up to -- a loss of ZAR0.14 up to a loss of ZAR0.01, so that margin also narrowed significantly. And I think it's an indicator of where the economic value-add is starting to trend, and in that regard also, very much in the right direction.

So on the financial review, statement of profit and loss. Basically an iteration of what I've just gone through, our number there. You can see some of the depreciation numbers coming through, impacting on the loss before tax, earnings and EBITDA.

But the trending, all in all, compare that one there, minus ZAR22 million to minus ZAR4 million. And this is after we've taken into consideration the depreciation and amortization numbers, definitely trending in the right direction. So, from a profit perspective, the economic value-add undoubtedly going in the right direction.

Looking at the balance sheet, for me that number remains key. Now just looking at the previous year, and when I say that number remains key, I'm referring to the cash and cash equivalents for the benefit of those on the podcast, ZAR204 million or just under $20 million. If you compare that to exactly one year ago, now between last year and this year, we paid down just over ZAR20 million, in the previous bond that was due, and another ZAR77 million. So it's about ZAR100 million of available cash that was included in that number that has since been paid out.

So if you then look at the year-on-year cash numbers and taking into consideration that we had -- still very much, we were in the high capital reinvestment phase up to about March of this year, then you can see that the actual cash burn, operational cash burn, the high CapEx investment notwithstanding was only about ZAR20 million to ZAR25 million year on year.

So we're pleased with where the cash flows are trending. Our business is all about margin. Our business is all about cash flows. Our business is about making sure that we invest the right amount of capital, in order to ensure consistency of cash flows and maintain margin. And that is an indication, I believe, that things are certainly trending in the right direction.

Right now, Jaco Schoeman, who's joining me, in front here, he took over the reins in July, operationally. He's been in charge of Ergo Mining, as the Operations Director. He's also the stand-in CEO when I'm away, if I travel then he basically carries my proxy.

And I think what we have seen in the last few months is that this business, which undoubtedly needs a whole lot of experience, a whole lot of intuition, there's a book by Malcolm Gladwell, where he talks about Blink, an intuition that -- understanding of the business that comes with many, many years of experience. I think we've come to a stage now where it's become imperative for us to combine those two things, those two components with a systematic, borderline pedantic approach to systems and procedures. And I think a combination of the two is what you are witnessing in the numbers now.

And just applying that philosophy on to what we are busy with here at the high grade section, where one-third of our total production is now being challenged and we call it a test phase; it's an operational test phase and a production test phase nonetheless. But we are very meticulously monitoring and measuring every single component and key driver of that circuit.

What we are seeing, certainly, are trends that are very much going in the right direction and other trends, negative trends, that have been significantly reversed. But I think the most important one here, just from -- actually the three most important ones, just from an operational risk perspective are number 4, 5 and 6 on the left-hand side column, each of which now has a green block next to it. Green indicating that we are 100% satisfied with where it is and it's working properly.

The water balance was a big issue for us when we suspended operations in March. We had a whole lot of water coming into the system. We didn't have adequate reservoir capacity. We know that a lot of water actually left the plant because we had to maintain the levels in the thickener.

There was a lag on the sampling of dissolved losses, which came in too late for us to really reverse the decision, but that had indicated that the dissolved losses had skyrocketed, which was going to be an indicator of poor carbon efficiencies. We thought that maybe there was carbon lock-up because we didn't see the gold in the dissolved losses.

And those have all now been reversed, including I think the thickeners. The thickener gave us one last scare -- hopefully one last scare earlier in the quarter, when there was a trip-out, literally after, because of something that had happened after every single measure that we'd put in place -- failsafe measure that we'd put in place. It was a -- I think it was a cable that blew, if I'm not mistaken, and then that had now been addressed as well. And the cable actually blew just on the other side of what I suppose I could best describe as a circuit breaker to prevent exactly that sort of thing.

The last of the thickeners that we have at our disposal has also been washed out now to provide for additional water storage capacity. I think one of the key issues here, associated with the logistics, associated with just throughput capacity, has now been addressed through these thickeners.

This is where we are now on the test work on aspects that we still think we can improve on. The high grade electro-winning circuit, we do believe that we may have to reconfigure it. It's not as if we're losing gold or not seeing the gold that we're expecting to see but the test work is indicating that there might be just a better way of doing this. In fact, I'm already talking through the second one.

The high grade electro-winning circuit, we initially saw some plating onto the electrodes that required acid wash, in order for that to be -- for the gold to actually come off, due to higher concentrations of copper and nickel in the concentration. But that I think's pretty much now been sorted out. So that's probably a light green color, no longer an orange.

It's the next one, the next one and the third one that I want to talk to you a little bit about on the leach efficiency and the high leach configuration.

So what we're seeing is that, although the mills are working really well, we're seeing that those pyrites are being ground down to the required fraction. And hence we know that the gold is actually ending up in solution, we don't quite see that coming through or presenting in the washed residue grades.

So, although more gold is coming into solution, and most of it, actually, settles onto carbon, it does seem as though something is competing with the carbon and most likely, at this stage, that might be the sulfites. It's negligible, but I think our business consists of addressing those negligible issues. If you address enough of these almost negligible little impacts, and ultimately you optimize it and you optimize it handsomely and the results are rewarding.

So what we're looking at there is maybe introducing longer leach time, maybe reconfigure it from CIP to CIL. And we do think that we would diminish the impact that remaining sulfites have on the carbon adsorption efficiency quite significantly.

And that is where this third thing comes in, a change in the leach configuration, potentially from CIP to CIL. And then that's pretty much a petty cash expenditure, considering the layout that we've got and the infrastructure that's already in place.

These two, we've kept the full extent or impact of float reagents on recoveries. Once again, we don't see less gold than what we think we should be seeing. But at the same time, not every parameter that we are monitoring, not every parameter that we are measuring, we've been monitoring, measuring long enough for us to confidently state that we've now established a trend. So this is more of a conservative, cautious statement than anything else.

And this one too, the extent to which the high grade section impacts on overall recovery. What we're in fact testing at this moment as we speak is we're keeping the high grade tail completely separate from the float tail.

So Jaco will explain this in greater detail. But this one-third of material, the 600,000-odd tonnes that enter the plant and that is channeled through the flotation and the fine-grind circuit, it first goes through the flotation cells, after having been properly prepared, it goes through the flotation cells. And that concentrate is then separated and that is what we refer to as the high grade section. It goes into the high grade CIP section.

The float, the tail float -- rather the float tail, the 96-odd-% that remains behind, that goes straight into CIL. At some point, this high grade section, the high grade section tail, this other 4% that have been floated out, after we've done with it what we wanted to do with it, that joins up again with the float tail. It goes back into the same CIL or set of CIL tanks.

We're separating that now. We said we're increasing leach time on the low grade, and we're separating the float tail from the high grade tail just to see the extent to which the high grade tail could potentially have impacted on the low grade efficiencies. And we'll know that in a few days.

We think that we'll be able to establish, through sampling, a pattern in less than a week. Maybe even in as little as three days. And then we'll decide whether we're just going to keep it separate or together.

But that is one of the last things that we really have to check before we know what the optimized configuration for this is. The advantage, though, as I said earlier, is that we are able to do all of these things whilst we're not producing less gold than what we thought we're going to be producing.

So, we're not fighting an inefficiency. We're not fighting some sort of impact or dynamic that is causing a problem for us in the production line. But we're picking up samples, we're picking up readings, measurements, that indicate that this in fact may be a better way of doing this and optimizing it even further.

Right, so I write about this in the letter to shareholders, the test focus, and this is really the layman's way of describing to the rest of us, who are not metallurgists or engineers, what it is that we're doing and what it is that we're focusing on.

Really, the five key things when I take this to the market, when I explain this to those who are interested in listening to our story, the five key things that we are monitoring through this test phase are these. And these are the things that have got to work well in order for the business to work well.

This float circuit has got to give us a mass pull of between 3.5% and 4%. Now, sometimes we see a little bit below 3.5%, sometimes we see up to 5%. And then my colleague over there warns me not to get too excited, that it might just be a very good day and not indicative of a trend. But be that as it may.

We want that float feed to contain at least 40% of the gold carried in the feed. So the 600,000 tonnes that enters the float circuit and that is floated out must contain 60 -- rather 40% of the gold that is contained in that feed, must end up in the concentrate.

We want the mills to achieve between 20 and 22 microns. They're doing that, but not at the efficiency rate, not at the bead consumption rate that we are targeting. So there's still a bit of work to do there as well.

And there've been one or two issues with mills that vibrate. There've been one or two issues with not generating adequate torque in the mills itself, so it's not running at the desired speed. But they're playing around with that. They're changing the beads, they're increasing the load of beads in the mills itself. They are doing these things, though, while we're achieving 20 to 22 microns.

So, once again, it's not a matter where we are fighting an inefficiency, it's a case where the readings that we're getting are suggesting that there's a better way of doing it, that there's room for improvement.

The leach and the carbon adsorption efficiencies, I think I spoke ad nauseam about that, going through the previous slide. The effect of the float circuit on downstream CIL efficiencies, I think here we do have the light green, Jaco, so maybe it's because the one slide was done at 9 o'clock in the morning and the other one at 5 o'clock in the afternoon. We're rapidly going through the numbers here.

And then reduction in the wash residues. There too, as I said earlier, it's not as if we don't see the gold, and we do know that the gold that we want to enter the solution is being liberated from the pyrites. We're just not seeing enough samples yet to say, well this is in fact what we are achieving.

The samples that we're getting are certainly trending in that direction. Sometimes we get a sample that is significantly higher than that, sometimes it's a little bit lower than that. It might be an indication of the sampling regime as well. But the trend, ultimately, will tell us whether or not we are there.

So this is something where we are still just keeping an eye on it, and we're not declaring victory just yet. But it is certainly a light green because the trends are very much our friend also insofar as that aspect is concerned.

So, in the months going forward; this slide is intentionally kept very short, with very few words on it, because the focus of the organization for the near term is very much going to be, get this thing to work, not just to work well, but to work as best as it possibly can. It is already starting to work well. It is already giving us the results on the table, coming out of the smelt house, that we've anticipated. But there are better ways and cheaper ways of achieving that outcome.

We're on track for completion of the test phase by the end of December. We'll take a decision then as to whether the whole of the stream is going to come through the flotation in the fine-grind or only a part of it. And the reason is not so much, I think, at this stage, or not only how good or how bad this thing is going to be performing, I think it's ultimately also going to be an issue of what is the best distribution of risk.

The flotation in the fine-grind is a far more complex -- although it's completely automated almost, it is a far more complex process with various different layers, additional layers in the circuit, that we don't have with the CIL. So, is the upside that we're going to be getting, if we were to introduce the other 1.2 million tonnes per month, is that going to be proportionate to the risk that we're assuming of pushing everything through this? I think it will be, but we're going to take a decision, not based on how I feel or what I think, we're going to take a decision based on the actual measurements.

And it will be one that we can justify, based on empirical evidence, empirical fact, and we'll be able to show to the market, this is the reason why we've decided either left or right or straight through the middle, because it is a risk/upside consideration.

I think that's pretty much what we wanted to share with you in the presentation itself. Obviously, the letter to shareholders goes into a little bit more detail.

I didn't spend too much this time around on the environmental aspects and the social aspects. I think the one thing that might be a question is just on the environmental side, where do we stand with our environmental management and what is our status on compliance?

It has been an exceptionally dry and windy quarter, so our performance, especially insofar as the dust issues in and around the Johannesburg area are concerned, have not been to the standard that we set for ourselves. And our standard is pretty much consistent to what we think the industrial level emission requirements are.

What we have seen, though, is that there's been considerable benefit from the vegetation process that we've had, or the program that we've had, over the last six years. Those areas that we've adequately vegetated, there is virtually no dust coming off those areas. The ones that are in the process of being vegetated or that have not been vegetated, and where we are trying to maintain dust levels down with dust suppressions, they're not as effective as vegetation.

Obviously, the challenge for us, it's not just a money challenge. We're channeling as much money as we can towards this. We've been spending, on average, ZAR80 million per year over the last 5.5 to 6 years on dump rehabilitation. So the numbers are significant and, therefore, the progress has been significant as well.

But it's also a matter of availability of water, there's only so much water that can be taken onto the top of these tailings dams. We rely on Rand Water Board for water, especially on the vegetation side, and their capacity is constrained.

So we're planting as quickly as we can irrigate. It makes no sense to plant if you can't irrigate. In those areas where we can't plant, we put up nets. As I say, though, this has been a month which we want to put behind us sooner rather than later because we haven't always been capable of containing the impacts of dust.

A big role is also the wind direction, there would be days, and I actually witnessed this, with a 30 knot -- a 35 knot wind, where there's hardly any dust coming off the tailings simply because of the wind direction, so from the north east. And then there are other days where the wind is from the west or the south west, where, because of the areas that we've prioritized, where there's a little bit more dust coming off the tailings.

So it's an ongoing program and we're not going to stop until we've got them all covered 100%. And I think the standard of what we have in place already is high. And, hopefully, the levels of nuisance that we create in and around those areas are significantly lower than what they would have been had we done nothing. And also what they were five, six years ago.

I think those were the key issues that we wanted to address. Obviously, we're here to answer your questions if there are any. Thank you very much.

It's Leroy from RMB Morgan Stanley. My question relates to the cost escalations on a rand per kilogram basis; it's flat and that's quite an achievement. But my concern is that that's driven mostly by the yield enhancement. And if you look at it on a rand per tonne basis, it's about a 10% increase between the previous quarter and this quarter. What would be the driver behind that?

And then my other question is, if we assume that the test work on the high grade circuit is completed and satisfactory by December and we then re-implement in January, would there be a ramp-up phase, or would you almost get the yield enhancement immediately from day one?

Remember that the only lock-up that occurs -- I'll deal with your second question first. The only lock-up that occurs, occurs in the system as it currently is, and that system is saturated; it's just that it's operating at a slower rate because it's only running at one-third of its capacity. So there won't be additional lock-up and the throughput would be immediate. Is that correct Jaco? That was my understanding.

And then insofar as your second question is concerned, that's really just the additional cost associated with the float in the fine-grind. That does bring an additional cost. And obviously you're running at full cost, notwithstanding the fact that you're only running at one-third of its capacity. But once you switch it on, there's no half measures, it runs at full cost.

(inaudible - microphone inaccessible).

Yes, that's another one. We had one month of winter tariff but obviously there was an overlap between winter tariff and the first month, and our labor increases come through as well.

But I think the cost that you see on a rand per tonne basis, I don't think there's going to be much of a reduction in that, except obviously when the tonnes increase and you would have noticed that our tonnes were slightly lower this quarter than last quarter, about 100,000 tonnes. There is an additional cost associated with the float in the fine-grind.

Anything else?

Dineo Faku, Business Report. I'd like to find out if you can just update us on your talks to get your hands on richer mine dumps around the neighboring areas where you operate. Thank you.

At this stage, we're not engaging with anybody insofar as richer or smaller dumps are concerned. We do have one land owner who's delivering high-grade material into the City Deep plant and they'll continue to do that for the foreseeable future. Grades are still consistent with what we wanted. It's not an enormous quantity but it's a nice little sweetener. But we're not engaged in any other discussions for smaller dumps at this stage.

Are we all done? Okay, thank you very much, everybody, appreciate your attendance.