Rolling the dice again

DRDGOLD bet­ting on its lumpy SA mines

Finweek English Edition - - Companies & markets - DAVID MCKAY

DRDGOLD CEO John Say­ers is hop­ing to have the be­lea­guered gold com­pany re­cap­i­talised – with­out sell­ing more shares – by end-March, but ques­tions still per­sist about one of the JSE’s most bat­tle-hard­ened com­pa­nies. The ma­jor worry is that DRDGOLD is dy­ing, in stages.

First, though, is how DRDGOLD in­tends re­me­di­at­ing its bal­ance sheet, which was badly struck by the R783m im­pair­ment charge it took on Vatak­oula, the Fiji mine it moth­balled in Novem­ber and in­di­rectly owns through its 79% stake in Em­peror Mines.

In an in­ter­view with Fin­week, Say­ers said there’s a num­ber of op­tions re­main­ing. But con­sen­sus among gold an­a­lysts is that DRDGOLD will liq­ui­date its in­vest­ment in Em­peror Mines by agree­ing to sell its 20% stake in the Porg­era mine to Bar­rick Gold, a Cana­dian firm.

Bar­rick has ap­plied ad­di­tional pres­sure on DRDGOLD by declar­ing sig­nif­i­cant cap­i­tal ex­pen­di­ture for Porg­era, no doubt a ne­go­ti­at­ing tac­tic to whit­tle down what it must pay to DRDGOLD. “I’m acutely aware. That’s why we’re keep­ing the com­pet­i­tive process go­ing,” said Say­ers.

The other main as­set in Em­peror Mines – Tolukuma – is neg­li­gi­ble, so the ex­tent to which DRDGOLD’s bal­ance sheet is re­me­di­ated hangs squarely on Porg­era. How much will the com­pany get for the as­set?

That’s dif­fi­cult to an­swer with an­a­lyst es­ti­mates rang­ing from R1,6bn ($212m) to R2,3bn ($320m). Say­ers in­di­cates debt left for DRDGOLD to settle is about R600m. There’s also a hedge book in Em­peror Mines es­ti­mated by JP Morgan in a 1 March note to to­tal R200m. “That’s prob­a­bly a bit high,” says Say­ers.

But it’s rea­son­able to sup­pose DRDGOLD will emerge from the Porg­era sale with net pro­ceeds of at least R650m. The

firm’s Aus­tralasian strat­egy would then be­come a thing of the past, leav­ing it to kick­start a new in­ter­na­tion­al­i­sa­tion in Africa. In the mean­time, it would have to sur­vive on its SA mines that are old and lumpy.

Asked whether DRDGOLD can sur­vive, Say­ers com­ments: “We think we can. We’re al­ready min­ing Sal­lies 1, which is an ex­ten­sion of ERPM (DRDGOLD’s 110-year-old mine).” Steve Shep­herd, a JP Morgan an­a­lyst, won’t build in value for Sal­lies ow­ing to in­suf­fi­cient in­for­ma­tion.

As for DRDGOLD’s other SA as­sets, it has had to with­draw from higher grade ar­eas in Blyvoor ow­ing to seis­mic­ity. ERPM is vari­able. And all this at record rand gold prices. You can see why DRDGOLD, though cash-flush, would be vul­ner­a­ble to its own op­er­a­tional weak­nesses and pos­si­bly to an as­set-strip by a hos­tile party.

On Africa, Say­ers says DRDGOLD is look­ing for ex­plo­ration: “We’re veer­ing to­wards ex­plo­ration rather than an ex­ist­ing mine. But the approach is broad. For ev­ery 100 tar­gets you may emerge with two,” he says.

“I’ve been the CFO of two ma­jor listed com­pa­nies on the JSE. I’ve been through tough times be­fore,” says Say­ers, who was fi­nan­cial di­rec­tor at Nam­pak from 1996 to 2004 and Al­tron Ltd be­fore that.

But th­ese are ex­tremely tough times for DRDGOLD.

The com­pany is now worth about 45% less than a year ago, and it’s been in re­verse for years, ac­cord­ing to ev­i­dence sup­plied by JP Morgan.

It says that in 2001, when the gold price was about half its cur­rent level, DRDGOLD pro­duced 1,1m oz com­pared with the 544 000oz it pro­duced in its 2006 fi­nan­cial year and with a gold price around $600/oz. Over the same pe­riod, shares in is­sue have in­creased to 338m from 94m as the com­pany has tapped share­hold­ers for funds.

DRD GOLD... CAN IT SUR­VIVE?

Source: I-Net Bridge

Hop­ing to have the com­pany re­cap­i­talised.

John Say­ers

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