DRDGOLD Ltd (DRD) 2015 Q3 法說會逐字稿

Thanks for joining us. Good morning. Thank you for joining us for the presentation results for the, both the nine months for the financial year and also the quarter-on-quarter results.

It's been a good quarter for us. I think we turned the corner on our technology implementation, the flotation and fine-grind and the metallurgical efficiencies that we'd been dealing with. And we think that you will see some of that in the numbers.

Key feature for us obviously is our black economic empowerment transaction that was approved by the DMR, which basically means that our structure as it currently is constitutes full compliance with our existing mining licenses. So the 26% minority interest that you will see on the first page of our financial reports, that's not going to change. That's all been fully consolidated and that is in exchange for roughly 10% of the shares in issue of DRDGOLD on the listed level.

For the nine months, we saw a nice jump in gold production of 11%. Now, you'll recall that it's exactly a year ago that we suspended the flotation and fine-grind after we tried to commission it a year ago. And obviously for that period gold production was relatively low. It accelerated from April onwards though, but what you're seeing here is really the effect of low production at the time and steady and accelerated gold production now for the last few months.

Our all-in sustaining costs are down by 9%, but it's still not quite where we want it. We will spend a bit of time talking about that as well. Also take into consideration that the formula that was ultimately decided upon to calculate all-in sustaining cost does contain a measure of non-cash cost. There is a capital amortization element I think included in there which might push that up little bit higher than what the two actual net all-in costs are. I see GoldFields are reporting all-in cash cost, and maybe that's a good measure to look at the actual cash profitability or cash margin of operations with all-in sustaining and strategic CapEx. On that score I'm happy with where we're trending.

Operating profit was also up nicely to ZAR261 million and EBITDA up to just under ZAR190 million. And in the quarter-on-quarter numbers, these are the ones that had us nervous at the beginning of the quarter because we were implementing both the second and third phase of the flotation and fine-grind at the time. There was going to be a time of inventory build-up but of gold lock-up and also there is always a bit of lag for the metallurgical efficiency to simply just to settle in to find its rhythm and for us to start dancing to the rhythm of the plant.

And middle January through to the end of February, I mean those were nervous weeks for us, we were holding our breath. You feel the, almost the temptation to interfere with how the plant is going to perform but you really just want to sit back, stick to the basics and wait for the plant to perform. And it came through spectacularly, quite frankly, towards the end of the quarter and we're very pleased about that.

The operating profit is up nicely also quarter on quarter by 16%. And for us the true measure of how well the business is doing is what's happening to our cash balance. And we're not a Company that saves on necessary CapEx. If the CapEx needs to spent, then we spend it. And we've been doing that. I think we've invested the better part of our market cap in infrastructure and upgrade in the last five years. So if our cash balance is positive, then it's really an indication of increased robustness in the business. We don't increase our cash position by deferring or avoiding necessary CapEx.

We're looking at a properly capitalized business that is starting to hit steady state and that managed to generate about 5% of its market cap in a single quarter in net cash flow. Now, we used that money to pay down ZAR55 million of the outstanding ZAR77 million debt that we had and ended up with just under ZAR390, to rather ZAR290 million still in cash. But that's before the payment though, just point that out.

But I think the nice thing is that we were able to cover the amount that we've got to pay back on these loan notes. In respect of those loan notes, all those who accepted the offer for early redemption, we managed to pay, cover most of it with the net cash flows out of a single quarter where two months out of the quarter were really months working towards stabilizing the circuit and where only the last month really was a stabilized circuit.

So looking at the operating trend, the two things that really affect our business the most are volume throughput and metallurgical efficiency. And we got to get 0.2 gram a tonne out of the combined circuit that we've got and we need to put at least 60,000 tonnes of material through the plant per day. If we add up those numbers, you will see that we didn't quite make the 60,000 tonnes, and there were a number of reasons for that. But, fortunately, all of those also were around the beginning of the year with a bit of load shedding and also some asset availability. And none of that as a consequence of what was happening towards the end of the quarter when volume throughput was really good and being matched by metallurgical efficiency.

So that helped us to, despite the fact that this was a month of commissioning and tweaking and fine-tuning or a quarter rather, we still managed to improve on gold production and we've had our second best quarter out of the last number of quarters, and interesting trends coming out of the flotation and fine-grind, and importantly finally achieving that 0.3 gram per tonne reduction in the residue grades, which was really for us I think the one thing that we wanted to achieve that was going to indicate a plant working in accordance with its design specifications and the assumptions upon which we based the initial decision to invest the CapEx.

My colleague, Riaan, is going to take you through the financial trends, and then I will wrap up at the end.

Thank you very much, Niel. Good morning ladies and gentlemen. It's my privilege again to take you through the financial indicators, the trends, income statement, balance sheet or statement of financial position for 31 March. And I love talking about trends like these and (inaudible) continues.

If you look at the operating margin, just a reminder, that is measure of the operating effectiveness, so it's operating profit as a percentage of revenue. And again very, very positive trends if we look at the five quarters there. All-in sustaining cost margin, Niel mentioned that often, yes, it does contain non-cash expenditure as well and which you can clearly see in quarter four of 2014 which was a very specific non-cash environmental estimate adjustment. In the fourth quarter, this was accreted, so that made that margin quite high. Without that, if you strip that out, if you want to look at a pure trend, it will be -- would have been in the region of about 3%. So again, also very positive trending upwards to the 9% in quarter three.

EBITDA, I remind again, earnings before interest tax depreciation and amortization, again a similar impact on the fourth quarter in 2014, of that roughly ZAR90 million adjustment. So again if you strip that out, it would have probably driven that down to about 20% -- ZAR20 million and again shows a very positive trend. Last quarter also had a specific sale of non-core land in that adjustment which would have made the ZAR69 million slightly lower, so extremely positive trending also in the earnings line.

As Niel mentioned, cash, I said it last time and I will say it again, when you get back to the office or tonight with family, friendly, loved ones, that's the one that you must talk about. So it's free cash flow. And please note, as Niel also said, the trend being over the last three quarters, so extremely positive free cash flow generation. A reminder, it's operating cash flow less investing cash flow. So all the CapEx that's needed for your business, as Niel has said, we don't all back on any of those, we still spend that on a regular basis to make sure the asset is maintained and operating in a magnificent condition.

So again, very positive quarter two at that non-core land cash flow of about ZAR40 million in there, so extremely proud of that ZAR44 million free cash flow in the quarter three generated.

Headline earnings, as I've now already mentioned that ZAR0.10 in quarter four also impacted by that adjustment. And again, maybe based on the nature of where we do our major revisions, the market would know that we don't do a full environmental re-estimate based on all the good environmental work we do through the year on a quarterly basis. So that is done on an annual basis and we are doing that calculation, the full re-estimate now as we speak in preparation of the 30 June 2015 position. And again, a very positive ZAR0.02 per share in quarter three.

Looking at the statement of profit and loss, you will see that revenue increased. And again I'm going to focus quarter on quarter. You will have more detail in our full report that you have access to here and also available on our website. So the revenue number increased by 9% quarter on quarter to that ZAR529.5 million as a result of a 2% increase in gold sold and a roughly 6% increase in the average rand gold price received for the quarter.

The net operating cost also increased by 7% quarter on quarter as a result of a 3% increase in volume throughput together with a significant increase in flotation throughput tonnages as the float plant came up to full speed. And those two together resulted in a 15% increase in operating profit to 97.6% which Niel has already mentioned. Depreciation marginally higher for the quarter. And as I've mentioned, no major movements in the provision for environmental rehab maybe quarter on quarter but with that full estimate as we do on an annual basis being performed as we speak.

Other income and costs, majority of costs in that line is the head office cost. Just to note again as a line item as presented here, the 17.8% represented 29% decrease in a comparative quarter in 2014 which is a very positive trend.

Net finance expense, majority of that is again a non-cash unwinding of the environmental provision on a quarterly basis of about ZAR10 million, at least as of profit before tax of ZAR16 million -- over ZAR16 million and profit after tax of ZAR11 million. Headline earnings per share of ZAR0.02, as already mentioned, and earnings before interest and tax, so that's basically the ZAR16 million plus that ZAR7 million and the majority of the adjustments, so that's in depreciation which is a non-cash adjustment but very much required in terms of IFRS presentation.

Statement of financial position, yes, you can see obviously the asset is being used, so that's a good thing. So the major capital expenditure has stopped and the asset is being depreciated, so that balance will diminish over time. The ZAR49 million included in that number, [I might let you remember] the last -- at the last presentation we talked about the Village Main Reef [office] the Heaven-Sent Capital of ZAR12.25, and that's a mark-to-market adjustment at the end of 31 March reflected in that investment.

I again want to emphasize the cash position, as Niel mentioned, up by 18%. And then Niel also mentioned part of that was used on the 7th of April to settle ZAR53 million of the loan notes early, so we communicated to the market in February that we want to seek early redemption of those notes and we successfully renegotiated ZAR53 million of those.

Current assets stable, up 6%. Liabilities up, current liabilities up 5% but that leaves us with a very stable current ratio of 1.6. And then just a quick word on equity, although you can't see it in a condensed format, but as Niel mentioned, because of the black economic empowerment transaction flip up where the BEE partners now own approximately 10% in DRDGOLD directly whereas previously that was shown as a non-controlling interest for the Group. It's now flipped up to equity of the owners of the parent, but all equity of the Group. So there is no fair value adjustment based on an historical cost basis, that's just all shown as the equity of the parent from 1 April going forward.

Long-term liabilities, very low, it's simplistically a finance lease obligation for the gen sets, that was capitalized in the second of 2014 and the environmental liability unwinding and small adjustments on a quarterly basis.

Okay, I'm going to hand back to Niel now. Thank you.

Thank you, Riaan. All right, so we built the flotation and the fine-grind circuit because we wanted to achieve an improvement of 0.3 gram per tonne on recovery efficiency and just looking at the black box number which is gold coming in and gold and residue leaving the plant, that is exactly what we achieved towards the end of March or for most of March for that matter. As a consequence Ergo plant produced more gold in March than in any other month since it was re-commissioned approximately eight years ago.

There is still some work to be done by presenting the fact that these parameters are being achieved. Our team have picked up on one of the two things that they want to tweak particularly in the higher-grade circuit, the carbon in pulp section, Jaco is here and he would be only too happy to share with you the technical details of that.

Essentially what it involves is that the pyrite starts competing with the carbon again towards the end of that carbon in pulp section, sorry, I may have said carbon in leach, carbon in pulp section, and I want to arrest that, by introducing carbon into the slurry or into the concentrated and earlier stage, and they do that by converting the CIP to a CIL circuit.

And maybe there is a little bit of more upside, we don't know. With the sheer size and volume involved in the circuit you don't really know until after you see the gold on the table. So you got to trust your, you got to trust the -- your technology, you got to trust your experience and you got to trust the knowledge of the people involved in the business. And everything I said that was going to happen in support of this plant is now starting to happen, so if there is a minor tweak or two that could further enhance the efficiency of the circuit, then it's certainly worth looking at.

The Van Dyk project, we spoke about at the previous results presentation. And this is really to increase the volume capacity of the plant from 1.8 million tonnes a month to 2.1 million tonnes per month. It also introduces through the Van Dyk reclamation site an additional, one additional reclamation site which basically means that the extent to which we rely on those three lines from Elsburg and further west from Crown and City Deep that those are amplified by one additional line. And the vulnerability associated with just one main stream coming from essentially a concentrated area that that reliance has diminished to an extent which basically means that you're creating a better headroom.

You know, these plants are designed and built in such a way that you've got to run them at 99%, 98% capacity most times and that there is very little room or scope to catch up. But by increasing the volume capacity of this plant, you're really creating a bit of pool capacity where the plant can receive almost more than what your various circuits can deliver. And if there is a necessity to catch up a bit, then you've got the infrastructure and you've got the optionality to do that. And from a risk management perspective, that is a wonderful option to have, the ability to just catch up that a little bit. And we've seen some of that down the last quarter as well where minor tweaking of engineering efficiency is assisting us to overcome some of the challenges being thrown at us and volume capacity being delivered into on a regular basis. In fact, it's become almost par for the course as opposed to a few months ago.

You can't have a presentation at this stage without also talking about the power situation and talking about Eskom's ability to supply power consistently and reliably.

December was not a good month from a load shedding perspective. We were finding our feet, Eskom was finding its feet to just get this load reduction arrangement in place. We had a few trip-outs in January as well. We also -- we were experimenting with, subsequent to the conclusion of the load reduction agreement, what is it that we switch off, what is it that we keep on.

Some of the measures that we put in place that we were going to take in order to drop our load by either 10% in the event of stage one and two load shedding or 20% in the event of stage three load shedding, we found out that we are actually dropping consumption more, by more than what is actually required. So we are revisiting some of that.

I think I did speak at the previous results presentation that we wanted to integrate just the measurement of consumption in a similar fashion that we are looking at every component of our reclamation and production cycle through our control room in the Ergo plant and they have done that. Actually there is a little yellow line that you can look at, with a 10% reduction consumption it's got to be below the yellow line and with 20% below the line below that, the blue line I think it is, Jaco, if I'm not mistaken.

And on the one or two occasions where we had stage three load shedding and we switched off some of the FFG circuitry, we came in well below the 20% requirement. And as it turns out, we might actually be able to by simply managing the water balance slightly differently, the water circuits slightly differently absorb most of the load curtailment requirements of stage one and two and see almost no impact on volume throughput.

In fact, the number of times that we had stage one and two in the last few weeks, it was very seldom that we actually came in below our daily call of 60,000 tonnes and on a number of occasions we came through higher than the 60,000 tonnes. So it does seem as though the combination of our engineering layout, the systems that we've got in place, the arrangement that we have with Eskom that those are adequate for us to address and absorb the risks associated with load shedding and the way that it's being applied at this point in time.

The impact of load shedding according to us, I suppose I can conclude, is to say that on volume throughput it is negligible. On metallurgical efficiency, the actual impact on physical gold production, we're providing for about a 10 kilogram production in gold production for over a period of one month assuming that there is load shedding every day.

We are not seeing load shedding every day, we are not seeing the impacts of load shedding on the circuit to be as severe as we thought it might be. So maybe that 10 kilos per month as on the right side of being conservative, of being cautious. So obviously it's something that we were extremely nervous about. We're holding our breaths to see exactly what the effect is going to be, but it's been perfectly manageable.

I suppose just one final point also on electricity and electricity interruptions. I have shared with you on a number of occasions that one of the key vulnerabilities in our circuit is the thickeners. These are the facilities to lift density before the material coming from the flow plant goes back into the CIL circuit so that your carbon remains in suspension. And if these things trip, then it takes a week to wash them out and to fill them back up again.

And in the months prior to January, December and January, as part of the engineering tweaks that we did at the time or tweaking, we put in underflow pumps and additional backup generator capacity et cetera, et cetera. And the few times where we had full trip outs, without any prior warning just a trip out in the true sense of the word, the backup capacity that we had created at those thickeners worked 100%.

And we hadn't had an instance where it was necessary for us to drain a thickener and flush it out and fill it back up again and the seven days that it usually takes to do that, we haven't had one instance where that was necessary since the implementation of those measures.

So it does look as though the reconfiguration of our operating footprint, installation circuits et cetera, et cetera has been successful and that it is capable of taking what the environment is currently throwing at it. And we are very pleased and very relieved about that.

Just on the sustainable development side, these are numbers that we just want to share with the market on an ongoing basis, so this is basically the rolling totals for the nine months through to March the -- on local economic development the spend was just over ZAR3 million, corporate social investment just over ZAR1.2 million.

All of these initiatives are in our integrated report and I invite you to read through it. It's, in fact, an easy reading document. It's a relevant document that really talks to the initiatives that we involve ourselves in.

Human resource development just over ZAR5 million. And then EBDA which is our college which we established six odd years ago with the intention of becoming self-sustainable and profitable, it has managed to generate a net cash profit of ZAR6.8 million in the nine months through to the 31st of March.

We have to hand that over to the community and we are setting up a trust. Beneficiaries of the trust are the seven schools that at this stage are taking advantage of the extra math and science classes that we are offering. They will be the beneficiaries of this.

We are setting it up to partner with a commercial venture just to provide the necessary business acumen and management acumen. We will be withdrawing from it. But they are receiving a business or a college that is self-sustainable, that can stand on its own feet and that offers a wonderful platform for further growth and expansion collaboration with a partner.

And then on the environmental spend, this is site rehabilitation, and this is vegetation, grass that we're planting to make sure that we don't cover Joburg in a cloud of dust. And I invite you to drive past our tailings dams near the Soccer City stadium so you will see the quality of what we are doing there. I think it's world class. It works really well.

You can see on the 90 points where we measure dust and the occurrence of dust in the air that there are very few exceedances, and this is directly attributable to the fact that we are spending this money on site rehabilitation. That is working really well. And the cost of that for the last few months was ZAR38 million.

I think once again I want to go back to the net cash situation at the end of the quarter. This is a business where the capital that has to get spent gets spent. The money that we've got to spend on sustainable development gets spent. The money that we have to spend in order for this business to stay in business and not be interrupted because of environmental non-compliances, the money there gets spent as well.

So from a sustainability perspective I think this is the sort of balance that you want to maintain. Of course there is another element to it all and that is the shareholder element, and with all those money in the bank obviously the shareholders aren't buying shares because they want to feel good about the corporate social spend, they are buying shares because they want to see a return on their investment.

Hopefully we will be able to maintain and sustain our reputation as a dividend-paying Company because we are building up surplus cash. And you know what we do with our surplus cash. So looking ahead, we want to continue to just look at the reliability of our assets and asset availability in particular. One of the key reasons why volume throughput in January was poor was because of asset availability, and that was essentially because of breakdowns, pumps that broke down. We had very few pipeline failures but pumps in particular at one of our main reclamation sites during the month of January.

Our engineering staff under Kevin Kruger's leadership have been doing a really good job to reverse that and we've had some really good volume throughput and very few breakdowns in the later part of the quarter. But we want to make sure that that department is also adequately resourced and staffed, that they've got the right systems, that they've got the right tools to continue to deliver the sort of performance that we are fast getting used to.

We get used to good performance very quickly and we want to maintain that. So we want to make sure that he's got everything that he needs. And so we will be spending a bit of money and time on just the asset maintenance systems, protocols and equipment. The refurbishment of the remaining CIL tanks, as I said earlier, that is key for us, that's a key priority to raise our plant capacity by 300,000 tonnes per month and to start up the Van Dyk because we do want that additional volume capacity.

The construction of the Rondebult water plant that is at the sewage farm, that's going to give us 10 megaliters of water per day. That will substitute water that we're either drawing from the natural environment or from Rand Water. It's cheaper water as well. We're not competing with the rest of Joburg for portable water.

So as I said many times in the past, for us this is a wonderful synergy or overlay or overlap rather of environmental capital and financial capital where major benefits but we're also savings money. So two bottom-lines are benefiting.

Conversion of the high-grade CIP to CIL, I spoke about that, to address some of the [desorption] issues that we still see. And once again that is towards the optimization, it's not to address underperformance but to enhance performance. And that's what we will be keeping ourselves busy with over the next few months.

All right. Thank you very much. Myself, Riaan and Jaco will take your questions. The rest of my colleagues are sitting at the back row there looking worried about what I might promise or what I might say, and they would also be happy to take your questions, they'll be here for a few minutes more. Thanks very much.

Are there any questions from the -- from podcast? None. Alright anybody.

Leroy from RMB Morgan Stanley. I've got two question, the one is relating to the throughput, so if you are targeting 60,000 tonnes a day, what are you running at at the moment and how do we expect that to build up to your targeted number? And once you've got the additional capacity, will that increase and what do you expect it to be then?

My second question is around the reliability of power, so my understanding was that Eskom had agreed that if you can curtail your demand during load shedding they wouldn't cut your power, but it seems like they have cut your power on some occasions. So I mean are you concerned about that, how do you expect that to impact your business especially running into colder months where there is a high demand for electricity?

Look, we are achieving the 60,000 tonnes. In fact, we've built up capacity slightly higher than 60,000 tonnes which helps us to from time to time do scheduled maintenance without dropping to below-the-average call of 60,000 tonnes. So at this stage or at this point in time since about the middle of February I think, we've been comfortably maintaining the 60,000 tonnes a day.

Your second question was the load shedding and the impact of that and the switching off, is that right? Yes.

So since January we haven't had any of those, we haven't had an instance where there was an unannounced complete interruption of power supply. We had one or two of those in January. But we think it was probably Eskom just settling into the load shedding schedule and inadvertently interrupting power without realizing that there was an arrangement in place. We haven't had any of that since then, February, March we haven't had any complete interruptions of power without notification. And, in fact, the load shedding arrangement or the load reduction arrangement that we had with Eskom has been honored. We haven't been without power for the better part of seven weeks I think now at any of our production sites.

If you do get down in production (inaudible). That is just a change in throughput once you have -- sorry, just the change in throughput once you have additional capacity.

I think we'll stick to about 60,000 tonnes.

Okay.

And we'll use that additional capacity to in the event that there is maybe an interruption -- let's say we've got the ability to do 68,000 tonnes with this additional site, for argument sake, per day, we won't push for 68,000 tonnes unless we've fallen behind somewhere during the course of the month and we need to push that in order to catch up because remember everything needs to leave the plant and ultimately end up on the tailings dam as well. And you don't want to sweat your tailings dam, you want it to be around as long as possible.

Hi, Niel, Abhishek from JPMorgan Cazenove. Two questions. Firstly a extension from Leroy, could you please guide us on your production going forward, what can we expect in terms of steady state gold production?

And --

We want to do 0.2 gram a tonne and we want to do 2 million tonnes a month. So we want to do 400 kilos a month, that's what we want to achieve. The metallurgical performance of the business is such at this stage and the volume capacity of the business at this stage is such that those are achievable. So it's either if there is an interruption in volumes throughput or a drop in volume throughput or if there is some rather impact on metallurgical efficiency that we will drop below that point. But that is certainly what we are chasing, is the two twos, 2 million tonnes at 0.20 gram recovery.

Okay. Thanks for that. And then could you please remind us as to the amounts that you have received so far from the Balfour sale and how much is left or how much you can expect to receive once the offer from Heaven-Sent is completed and then what do you plan to do with the money that you get?

Yes, in the last quarter I believe there were two milestones, important milestones, and this is based on what I saw in the media and on Sent, the competition commission approved the transaction and the shareholders also approved the transaction. I believe a key condition that is still outstanding is the consent from the regulator, from government, the DMR for the transfer of the licenses and then it will go through.

I think, there are two parts to this transaction, they are the shares that we hold unencumbered which once it's sold I think it's about ZAR40 million if I am not mistaken and then there are escrow shares which are the shares that are in dispute, we're claiming those shares from DMR on the basis that it was their non-compliance with conditions of the agreement that got in the way of the delivery of those shares. They are defending the claim. And then there is also an escrow dividend. I think those two add another ZAR12 million, ZAR15 million odd million to the total if I am not mistaken, thereabout.

Yes, ZAR10 million to ZAR12 million.

Yes.

Yes.

Yes. Look, nobody wants to litigate. So I think hopefully pragmatism will determine the outcome of that dispute as well at some stage because it's really become a dispute with Balfour in liquidation, it's really become a dispute about money and not much else, and those are resolvable. So we hope to resolve that at some stage. But money that you can bank on is about -- is the roughly ZAR40 million the unencumbered shares. And it will come into treasury, and if we don't have anything to spend it on or if we don't have to hold on to it in order to maintain our buffer, our working capital buffer, then we will distribute it, we will either pay a dividend or we will buyback shares if the share price stays low.

There is nothing.

Nothing else, okay, lovely. Thank you very much everybody, we'll be around for a few minutes longer if you want to ask questions. So feel free to do that.