DRDGOLD's (DRD) CEO Niel Pretorius on Q3 2014 Results - Earnings Call Transcript

May.14.14 | About: DRDGOLD Limited (DRD)


Q3 2014 Earnings Conference Call

May 14, 2014 04:30 ET


Niël Pretorius – CEO

Francois van der Westhuizen – CFO


Adrian Hammond – BNP Cadiz

Brendan Ryan – Business Day

Niël Pretorius

Good morning everybody. Thank you very much for taking the time to listen to our quarterly presentation. I mostly see 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’re 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 in so far as our new technology is concerned. Please take cognizance [ph] of this claim, the wording of our disclaimer because we do make some statements may amount to forward-looking statements, just treat that with necessary caution. So the key features or the highlights are fairly success [ph] this quarter. You will see we only went with three bullets.

We referred to the gold production over nine months. Obviously the gold production in the last quarter was pretty dreadful and we will deal with that in the next slide. Also the all-in sustaining cost trend which has become the major I think in the industry to gauge the health of our company, so much cash flow it generate and then also just sort of reflection on the cash balance. You will see on some of the earlier slides were slides sitting at the cash flow balance overtime that we have been in a negative cash flow till now for quite some time with the final capital expenditure on the construction of the floatation and fine-grind circuit. We manage to reverse that in this last quarter not presenting the affect that we had significantly reduced revenues and costs that were about 25 million and were higher on quarter-on-quarter total varying costs.

But we had a favorable working capital swing I believe and then also the reduced CapEx were contributed towards healthier cash balance quarter-on-quarter. So this is probably the thing that I will talk about most because that’s one bit of good news that we’re bringing to this presentation but we have got these slides, on one slide the trend [ph] 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 will see that on the volume side we’re pretty much on par with the average for the last few years with the exception of those two outlines there. So volume certainly wasn’t the issue this quarter. This is obviously not a happy trend, the fact that the recovered grades were yield came down as much as a bit and I will spend quite a bit of time talking about that later in the presentation to give you some context in that regard and of course these are directly related.

Lower yield results in but it has probably being one of our lowest gold production quarters in many, many years coming out of these circuits for the reasons that I will elaborate later on the presentation. The financial indicators, there you could see fairly steep reduction in the cash operating margin. Fortunately we still had a cash operating margin, all-in sustaining margin was negative there. EBITDA slightly positive 16 million that’s an important number because that determines the recover 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 doesn’t drop to below the recovery ratio, it's two times interest cover that we got tom maintain but 4 million a quarter I think.

So we got to make at least 8 million a quarter in order not to force out of that until June and then after that it's quite low because then the outstanding base is only about 80 million. Then the free cash, we’re happy about that number. I will just look at those, I mean that was a spectacular quarter a year ago and this one also wasn’t too bad either and if you look further down in the presentation when we talked about the income statement, the revenues a year ago were in fact 100 million ran higher quarter-on-quarter. Which is an indication both in the drop in gold production rather but also the changes that we have seen in our price environment and then headline earnings are also negative by $0.07 per share down from $0.14 a year ago.

So these are anything but happy trends and it's because of what we are witnessing here that we took the decisions that we took with regards the time out on the floating and fine-grind and that we’re implementing the measure that we are currently implementing. Because these are numbers that we’re comfortable with, I think these are the numbers that the mining, the investor community became accustomed to.

Certainly the expectations that we cater into that market and I think that’s why, maybe a year ago our share price was at the twice where it is at this point in time, it's all about performance. If these numbers look good share price looks good.

Here you could see the comparatives, quarter-on-quarter and year-on-year and there is the 100 million that I’m talking about. So that’s the extent to which reduced production has impacted the amount of money that we have gotten. Also look onto the next slide to that number there, the decline of 200 million in the cash balance, we did raised it and we did push it back up again but it very much talks to that number there and that number there. It’s really where the difference is coming. Also in comparing net profit and operating profit quarter-on-quarter and comparative period over comparative period.

We’re pleased though that we’re 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 fairly steep slide in the third month of the quarter but of course these numbers do trend as aggressively negative as they did.

So looking at the balance sheet, I think that as an important indicator of the financial status or the financial health of the business the fact that we still are maintaining at current ratio of 1.6. So it's certainly a business I think worth trying efforts and resources and dedication towards because it is by no stretch of the imagination in a crisis because 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 advantage point.

But this is certainly not where we want to be. We wanted to be doing a victory lap at this stage telling about how success our fine-grind flotation circuit is and how robust the platform that was going to be for us moving forward. Moment what we had to do instead of being at victory lap and waving to the crowd is dealing with reality and we will hopefully 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’re in.

Now you know that about a year ago we start 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. 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 chances. The fact of the matter is that at that time the hold priced had outpaced the rise in costs but that trend has very much reversed now. Costs are catch hiccup 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 not imported but they are import parity priced. So there is a drop in the value of our currency and there is an increase in our cost which is disproportionately higher than your normal CPIX numbers locally.

So in order to address the issue of diminishing grades overtime and address the issue of shrinking margin overtime. It became important for us and essentially for us to introduce something that protect the same product and enhance its value. The same amount of material coming into the plant would give us high revenues and high gold production. Without that DRD Gold 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 20 year life we faced with a five or six year life the last few years of which are probably not going to involve a consolidation of everything that we need to clean up behind ourselves or the size that we were on, the environmental impacts that community impacts and so forth.

So this is something that we did last year, not only because we wanted but because we had to and it became essential in order to fully exploit the resource under our control. We built a float circuit when we refurbished a float circuit that has the capacity to receive our entire on our [ph] mine 1.8 billion tonnes a month and we also built some high grade rather fine-grind most which was going to break the pyrites that will flow to that, break it down until all the little gold particles that were encapsulated in those chunks of pyrites. They have been liberated and it became soluble and they can 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 have to concentrate that we wanted to create slightly higher recovery than what was necessarily planned or anticipated. So the float circuit works and the mills also work, the mills managed to grind down after few initial hiccups where it was really making mill shake [ph] as opposed to mulling these pyrites and most started working and it started breaking down this particles through the required fraction.

And looking at the wash residue values, that’s the value of gold. The gold content on the solid steady leave the plant at the entire of this entire process at the backend. Looking at the trending in the wash residue values, this float circuit and these mills achieved exactly what we set out to achieve namely to liberate an additional 0.3 gram of gold per tonne of material entering the plant. That was the target.

An additional 1.8 kilos of gold a day and an additional 30 particles per billion that is what we targeted that was what was going to be broken up and released and introduce into the metallurgical process. So the tough part, the hard part, the unknown part that worked really well and gave us the desire to resolve. When things became problematic is that integrating this material both the float tail and the high grade tail, the 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, started raining 4 o’clock every morning, stop raining 10 o’clock every evening and it did so for three weeks uninterrupted. That rain ended up our on our tailings dams where our reclamation sites that water was carried into our plants and you can only do one thing with it, better go into the plant and through the process and from there it's go on the tailings there. That water impacted obviously significantly on the densities of the material entering the plant. We have 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 to be slightly higher density in order for the CIL process to work properly or else the carbon particles don’t float, they just sink to the bottom of the tank. Managing that quarter 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 monitor fully.

We estimated and we subsequently measured that the water in circuit ends up containing roughly 0.2 gram of gold per 1000 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 particular the three week period during which we have 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 is electrical trip out, then the pumps which is 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 have 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 stoking and then the thickener trips.

There is this thing with the extremely long arm and an extremely wide moment and there is a lot of talk happening within that whole setup in that whole operation and the stokes [ph] trips also burn up the motors sort of a process that’s built in there.

And the problem is that if this thing trips then you don’t have just some hour or two of interruption. You got a week interruption because you got to drain the dam thing and you got to fill it back up again and now you’ve got the 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 those off switch that on and try 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 turned out to be hugely problematic and we came to the conclusion that this thing we’re not going to store while we’re in mid-air. We still got our land and just playing before we 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 thought initially that there was a big rubber in the solution portion because this is a CRP circuit it is not a CIL circuit and activated carbon was introduced there and I think that to an extent maybe causing the imbalance in just how much carbon was moving through the pump cells, in the first instance and then the pump cell. Secondly there was a 3.5 tonne 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 what you call as rhythmic maybe is 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’re on a CRP circuit and then maybe there was some changes that need to be done there. But once again if you’re running full tilt 1.6 million tonnes and things are coming from every direction, you’re not going to fix that in midstream or midflight.

We also have carbon efficiency issues in the low grade circuit, the conventional CIL circuit and what you 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 great solution because remember not all the gold that is attached to pyrites was gold that initially just found its way in and then found its way out again. Some of that gold was soluble. The floatation 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 is 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 off to as to what kills and we’re 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, that process have not been recalibrated or reconfigured to produce the desired results and other which you had problem upon problem upon problem coupled with inefficiency and another inefficiency and as I said earlier you talk about 30 parts per billion that you're pursuing, these little efficiencies or inefficiencies add up and before you know it's just a mess and you can’t fix it without just talking a step back calling time out and starting all over again. And I spoke about the thickeners.

The two things that we don’t quite know yet which we will investigate during this period of time out and investigation, the one thing is the full extent to which the float reagents impact on carbon efficiency because these reagents are organic, it's like an oil and there could be a coating effect or failing effect on carbon and we will test that separately to see exactly the extent to which we can expect an illusion 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 stay behind and 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 on the lower grade.

So the things that we’re going to be doing -- Francois just pointed out to me that we didn't make a loss after tax nor the profit after tax but I’m sure you all picked it 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 to expect and where to expect it from and if you see your full cost for the month being adjusted every week and being adjusted in the wrong direction unfortunately and clearly you 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.

Keep in mind that although we've got R200 million in the bank, we’ve got some commitments that we got to meet in the not-too-distant future. The one is the R21 million rehabilitation guarantee that we got to pay and then there is that 70 million odd that we have to pay in July. Now that is money that we cannot cash because it's due when it's due it's got to be paid when it's paid and you cannot just blindly based on blind faith and hope and run this process and close at such time that it sorts itself out. Not if you’re burning cash at the right of R10 million or R15 million a 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 and talk about the low grade so we can talk about everything that was there before we built the flotation and the fine-grind. Let’s go back to that of that and just see how much gold can be produce. Where does it sickle down? See what the cost profile then looks like in order to produce the number of kilos that process this 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’re sourcing some high grade materials into the City Deep plant. That could have a during this period an important not significant but still a significant in numbers but important in considering in considering which period of time we find ourselves in or phase we find ourselves in. It could top up the production by maybe 10-15 kilos, maybe even 20 if we manage to get the volume three put that we are looking for. So that’s gold that wasn’t called for the existing circus [ph] but that can top up a little bit.

And during this period obviously we will look very closely at the water management regime that we have got, make sure that everything stays in closed circuit. It involves trading some reasonable space, there is a fourth thickener that’s not being used of those capacity. If you’re running too difficult we got to do something with overflows, it's going to go into that fourth thickener.

We also want to make sure that the thickeners themselves are no longer is vulnerable to trip outs and surges as they were during this period that we ran them and that basically just means that we got to bring in supplementary power, or auxiliary power rather so that those motors can run and the pumps can run and just keep that 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 just to keep this whole thing in suspension

That’s the engineering upgrade that we are talking about, carbon efficiencies, will measure literally every component. We do measurements on the various stages of the process but in -- starting up the high-grade circuit and starting up the float circuit and the fine-grind mills. Well initially only run 1/3rd of its entire capacity and 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 recovery. That we will find out because test work will take place in an isolated circuit and then of course all this carbon inefficiencies that we had the kilns that didn’t work properly as it was that wasn’t optimally calibrated those have in fact being addressed and we will just make sure that the short interval management protocols that have been implemented to manage those into the future and those will done as well.

What I didn’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 have allowed some factor 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 the curricula of 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 1 or 2 engineering course is suffice? These are things that we were looking to over the next few weeks. We have already considerably reduced the size of the corporate footprint. Francois after he took over, he reduced the cost of the finance department by 20%. I think it's only still 10% off target I think I said 30%. But we significantly reduced that and established a management regime in terms of which there is line of site management from this office trading to the operation with a very little duplication and we will continue to develop that process and he is working very closely and with the full support of Mark Burrell, the FD of Ergo. So there is a nice dynamic happening there as well.

That will happen with the rest of the corporate infrastructure as well. There will be, we’re one operation entity at this point in time. Few years ago when you were listening to this presentation you were listening to results come out of ERPM and out of several different operating areas. That’s no longer the case. These are one business, Ergo with some auxiliary plants and some smaller plant scattered around there. That’s going to change now. Well that has changed and as a consequence the requirement or the necessity to have this separate corporate office far away from the operations, it has become unnecessary. We can now integrate to 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 at Ergo. That’s where they work from, they no longer have offices at the corporate office and ultimately all of us will find our way, or the functions that are currently still being performed at the corporate office will find its way into Ergo.

So I think there will be an step change, there was a step change about six years ago when we dropped our corporate cost from 120 million to 60 million during the 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 it's shrunk quite a bit after we sold off it to Emperor.

Now we’re in other phase where there is going to be that step change where we can very significantly reduce the size of the administer portion of the business and make sure 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 prominently 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 have covered the step 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 ran at -- we ran at the speed but I think one of the contributing factors of the fact that we had brought the 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.

The flotation and fine-grind plant had about 7 gram a tonne to the monthly overhead, so that R14 million or was just under R14 million we would take. And you want to make sure that you produce enough gold to cover that additional R14 million before you enter your winter traffic phase which starts now and which adds about another R7 million to R8 million to the monthly cost. So you can’t be still commissioning plants and paying this overhead and not making enough money to cover that overhead and just have this additional top up cost of R6 million to R7 million.

This thing is got to be up and running and covering -- 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 call time out now and the very important driver in the timing of recommissioning 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 got to pay this additional R6 million or R7 million a month in electricity costs.

So, the test work that I talk about here, the engineering work will happen. I mean we’re putting the underflow pumps and we’re putting in the valves, the desalting valves for the float cells et cetera, et cetera. All of those things are going to happen. Second, we got to do an audit to make sure that our carbon management protocols and regimes are in place. Those things are happening as we speak. We will probably start draining the 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 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 mine into these float banks, there is an immediate lock up of gold for a period of time and till such time is basically saturated that circuit and the gold comes out the other day and it could be a few weeks, it could be more than few weeks. We will know when we know but you can’t run the risk of diluting the gold production while you’ve got this overhead, it is disproportionately higher overhead because you got to cover these electricity costs.

So those two important considerations will determine -- have determined that or guided our thinking in the test work and the recommissioning to the extent that these things will happen and the retesting will happen in September, start happening in September. We will test for at least three months but only 1/3rd of the total running 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 take 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 have established and I think what we have known all along is that you can’t really simulate this process. 60% of the upside that you are pursuing is in conventional terms deemed to be within range of acceptable SA era. No hypothesis or test work or little laboratory test is going to give you an adequately accurate indication of what are these that you can expect once you fire this thing back up again.

This business because of the nature of this, 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 reintroduce the sequence into which we would reintroduce it and the decision three depending on the kind of results that we get out of this as we go along, it's going to be very, very conservative.

So, if we are talking timelines September is when we will start test work, three months is how long the test work will take. If we’re confident that we would achieve levels of confidence that we set upfront then we will reintegrate and that is a process that will take a few minutes to settle down at the year.

So hopefully by Christmas we will be able to buy ourselves a nice little congratulatory Christmas present because this thing is working as well as it is 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 there after’s results and the December results that we can shall show up here in 2 or 3 or 5 years from now and have good results. So we’re working towards a 5, 10, 15 year horizon here.

We’re certainly not working towards the 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 confidence to traders but that’s the business of business and it's going to take us 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 is also since this is becoming so or this has become so topical, I will just spend a little bit of time on what is now increasingly being required of businesses. 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 and we live in a triple bottom line environment where we not only have to create financial value, financial capital but we also have to trade social value and environmental value and DRD Gold with a luxury of the cash flows that we enjoyed up until recently has fully brought this on board.

The whole concept of sustainable development and implementation of sustainable development goes through a process of what Mervyn King calls integrated thinking. As 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 250 million and up and maybe have had a slightly better production month maybe 300 million up and we could have pleased the market in our end with just how spectacularly successful we’re only to tell them in 3 or 4 years that we are entering the 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 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 it's got to come from rand water as well.

And of course to move 2 million tonnes or 1.8 million tonnes a month, we consume enormous amount of tar and it's also very volume sensitive. So you got to run at peak the whole time not very 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 ore body but it is 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 have drawn up this little thing, it's not scientific at all. The accountants and the engineers work with square blocks and they would create columns that always has to balance that and they might be a little bit outraged by just an inaccurate. This is more an interpretation of where I think we’re compared to where I think we want to be and so far as sustainable development goals are concerned.

I will 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 waters in one of your working areas and into natural streams. You cannot allow dust, dust in particular to simply just being blown off your tailing dams and into the surrounding areas. Now we have spent because this is something that we feel very serious about. We have spent in the last five years up until 2013 on average, R80 million per year on the rehabilitation and the vegetation of dams. And I can tell you that it shows.

We have had some fairly strong winds blowing in and around Joburg in the last few days and I have been to Ergo in the last month probably more than I have went to Ergo in three years before that. So I drove past those crown tailings almost every day and I can tell you that I have witnessed that hardly any visible dust is blown off the Crown complex and if you look at some of those side walls that have been or the side slopes rather that have been vegetated that is top of the range stuff.

There is not a speck of sand visible off 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 back there.

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 have already reduced our consumption of Rand Water Board by that 10%. Our purpose and our goal for the next year and I have spoken about this in the past is to introduce grey water from storage farms [ph] into our circuit and to exclude far more of the Rand Water Board consumption and what we currently do and also to not have to draw from natural streams and natural reservoirs that we have booked because those are also going to be diminished overtime as we maybe into 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 introducing to the natural environment because it is grey water. It isn't treated maybe exactly to the standard that we want to, that is being brought into our circuit where it is being consumer.

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 share price also flat lined and we said you know what, if we are not going to be offering anything to our shareholders maybe we should be looking at least somebody who could benefit and find purpose in what we do. We find purpose what we do for the people around us.

So what 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, I won't go through the entire social capital program but one of the key areas was the schooling of the school children on the maths and science side and I can tell you that we are now supporting I think it's 5 or 6 schools, where we deploy a math teacher, a science teacher and accountancy teacher and just to give you some of the results, Langaville for example talking about metric results last year. Langaville’s pass rate in science has gone from 27% to 70%, on maths it's gone up from 53% to 70%. There is another school called Tlakula science up from 53% to 70%, maths from 56% to 58%, Tsakane up from 61% to 75%, and science, maths, up from 61% to 70%.

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

Now a very important aspect, another very important program that we’re involved in. It's just adjacent to one of our reclamation sites. Community has been complaining of respiratory problems and especially the elderly and the younger people had complained to that and initially the allegation was or the suspicion was that this is dust related but problems have been there even before we started reclaiming that particular site. Cut long story short, we saw that many of them were using wooden and coal fires to cook and also for heating. And there is a guest program they are burning with the gas stove program, that’s now being rolled with the gas shack locally, economic development project, a little business has 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 a sort of social capital that we operating, we’re the most decent franchise live [ph] this is for the social capital that hopefully one day will add real value into this particular stock.

On the human capital side our approach is very much due in-line with the fact that we’re considering ourselves to be a technology company. Establish a knowledge base labor force, we want our people to bring the intellect to work and to apply the intellect in going about the daily task, the 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 the living wage.

If I get paid for moving chairs around the value of moving chairs around is R12,000 a month, it maybe R2000 a month that’s the value add, the economic value add that you make by just moving stuff around. So we want people to become knowledge based, we have 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. Overtime it's up to 10% and two years from now we will have another I think 40 odd that will qualify for that and these are guys that have been there since Charles Symons was there, when we started the business, when we started Crown mines. They have been part of this team for 2.5 decades -- sorry Charles, 2.5 decades they have been part of his team and they are still there and I will tell what, if you look at them and you know that you want this guy to be around for another 20 years because he is worth every penny that you pay him in salary every month.

We’re encouraging our employees and we are establishing resources and infrastructure to develop to the full capacity. We refer it to as best life. Best Life is 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 that people don’t take irresponsible debt and work towards the time and so that the day when you finish your work here that 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 intellectual capital that we deploy is equally geared towards that. We want this to be something that you can license out to other commodities and 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 could have the social capital, the environment, the human, manufactured and intellectual and you are still out of business it doesn’t make you a business, it gives you I don’t know what is the better word and you will excuse me for using it, it gives you (indiscernible). If you have got proper social capital and proper environmental capital and human capital development then you got bestaansrecht and you 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 can deliver into 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 add value, it's got to be a financial capital component in there. And that is where in the last quarter we certainly haven't been delivering into the reasonable expectations, legitimate or justifiable expectations of our stakeholders because of hiccups that we have incurred and then mainly self-inflicted hiccup.

I do have a green bar there because I think we can justifiably give ourselves of a green bar because we have 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. So I think we have got both the components of being at business from financial capital but we also have the legitimacy and bestaansrecht to continue to do business gaged against all the other capitals that have become part of our reality.

Now the magic of sustainable development lies in the ability to over let these things so that your social capital initiatives also deliver into the financial bottom line. Financial capital is what makes your business, social capital is what gives you legitimacy, environment capital is probably what makes you sustainable in the long term and that make sure that in 50 years from now we are not walking around with UV filters and oxygen mask -- so the business the way that we’re doing it now.

But if you can find the over let 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 and 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, our programs that have compelling value add components on the environmental capital side, as at the same time delivering into the financial bottom line, because we will be able to mine few tonnes in other words spend less power, smaller carbon footprint in proportion to the total number of ounces that we produce through the technology that we have got without spending more money.

We will be able to consume less water, place a lesser burden on the environmental capital and yet still yield a similar if not better result because it is going to be cheaper. When the cost come down from R6 for Q2, R1.50 [ph] assuming that’s a -- somebody who is clever with number can work out but that’s a lot.

That’s the essence, that’s the beauty of intelligent and well thought through sustainable development, yes so to maybe summarize and to just iterate. I think we qualify as a business because there is a compelling financial capital proposition in the long term. I think we have got the manufactured and intellectual capital to sustain the business and to optimally exploit our resource in the long term and I think we have got legitimacy. We have got bestaansrecht because of the initiatives from the social environmental and human capital side.

So back into the expected basis, it's become once again a very honest approach to our reality, what we got to do but I think we have got the team to do that and they certainly be given the room, the space to do what needs to be done and they have been given the reassurance that time is on their side because we’re taking a conservative approach and hopefully we can progressively report back into the market, the progress that we have made that we’re making and the verifications that we’re seeing.

So that’s it, mouthful but thank you nonetheless for not falling asleep or throwing old fruit at me.

Question-and-Answer Session

Adrian Hammond – BNP Cadiz

It's Adrian Hammond from BNP Cadiz. I have four questions, firstly for Francois. Just quickly on what’s the additional CapEx you need to do the engineering upgrades that needs to spent?

Francois van der Westhuizen

We’re still working all of that out but it should leave the cost associated with the fine-grind and that would be sufficient to cover most of it.

Niël Pretorius

Are we relieving 2 million month on the table so we didn’t slash away all of the 14 million in total cost, we’re leaving behind 2 million a month for the engineering upgrades.

Adrian Hammond – BNP Cadiz

I had three questions for you Niël, firstly it appears to me now that with or without the fine-grind, you’ve uphill battle with rising unit costs on per tonne or on pounds basis. What more do you think you can do on the cost side to keep this business really I think we’re talking about sustainable -- I mean you have gone to all these pillars capital here and obviously the most concerning one is the environmental and 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 your intention to buy through minorities, could you just give us an update on that and what’s the implication for meeting your 2014 the BE charter requirements and then lastly as I understand they are pumping AMD now at ERPM through TCTA. What is your commercial agreement with them using your that -- these area -- any upside for you there?

Niël Pretorius

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 asset mine drainage. Our arrangement with the TCTA is that they can lease from us the shaft infrastructure where they submerge their pumps and also the land on which they have built the pumping infrastructure or rather they plant infrastructure.

And then they can also introduce at a predetermined rate, at an agreed rate which has already been fixed, they can introduce this slurry into a position lines, our residue deposition line 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 on our tailings dam.

And so far as the usage of our facilities of concern or facilities is concern, we didn’t charge them a market related price for the usage of the shaft or 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 having access to the deposition facility. But we have created let’s call it a future contingent credit of about R250 million against which we can offset until after we have determined the actual amount, any future directive for contributions towards capital requests and so forth and so forth.

So we will have an income stream in respect of the slurry that they have deposited on to our tailings and if there is any suggestion in future of having to make such any kind of contribution, there will be 250 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 actual cost of treating the waters in other words at net cost as and when we want to. So if the sewage water becomes insufficient then we can top that up with their water. The water is the one that we are least excited about because that contains high quantities of lime so there is going to be a scaling problem, so we want to avoid that water but it's a fall back situation for us and obviously you could do something to maybe diminish the impact of that lime.

On the BE side, we have posted the circular this week, I think that’s where we’re with that. We have posted the circular and we are 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 BE compliance. If the consent is not given based on the terms contained in the consent because remember the BE level are discretionary levels determined by the minister in terms of a statutory authority agents. You publish a certain levels but it has the discretion around those levels and on the look through basis in particular if you can show that there is a link between the equity holder and the holding company and what 26% is worth in the subsidiary company and then those are more often than not are accepted as adequate.

But the 102 consent is what will ensure continued BE compliance. And then on the cost side I think one of the things that we have done because of -- there is quality accelerated expenditure on the likes of environmental management expenses by way of an example. I think we rushed ahead a little bit and just how much is necessary in order to contain the effects of our current environmental footprint. So in that regard we’re not doing any active spending at this stage. We’re pretty much just holding and maintaining the existing environmental improvements that we have made and there is quite a significant saving in that regard, now that is not something that you will do indefinitely because I mean if you sort try some of the other side slopes of the Crown tailings you will see that instead of lush vegetation there was netting. A netting is a temporary measure, it works very well but it's not a permanent solution. You got to get the vegetation and so at some point or another we will have to recommend where the vegetation of the slides starts slopes in particular.

But that won't happen, but there is some cost coming out of the actual equation and then of course I mean the process that I spoke about around the consolidation of the corporate footprint and the operational footprint reconfiguring the lacks of the EBDA facility, the training facility and add all of those things -- how many course -- runs Ergo, said to media the other day, we’re not going to save R10 million on one single thing. We’re going to save a R100,000 100 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.

And I do think and I do believe that there is adequate margin in the operations if we look at our costs in that way, we have got a very interesting a little tool that we have planned where we will take this total cost, supporting cost every last cent that we got to spend. And we look at different variables on gold price and gold production and that seems to indicate that we could keep this thing going the way that we have and have some margin and some flexibility until such time as we reintroduce and that’s why the reintroduction and the test work has not been done with a haste that we were working earlier. We were doing at a more measured pace to make sure that we have got the necessary verification.

Adrian Hammond – BNP Cadiz

Just to come quickly based on minorities, I mean how stressed [ph] are you of getting this consent on a two through and this is quite pivotal because in my mind if it does it means that the term once in part, is part holds. What do you think?

Niël Pretorius

Not really, look I think if I look at the new codes that have recently have been published, it's look as though the compromised position on the ones in part always in part concept is one in terms of which you’re entitled to claim BE credits for as long as you have held them before there was an exit. Let’s say you were in BE compliant for five years and there is a (indiscernible) then you would be able to claim this credits for five years. 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 in part always in part what we’re saying is to the minister, we want to do this deal in terms of this deal we have translated 26% of value into a percentage in a holding company and we believe that this is the number of shares that amounts to. Give us a 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 then there is 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

Hi Niël. Brendan Ryan, Business Day. Two questions please. The first on the timing of the working you have to do, am I correct in assuming that this case you will have your free float grind and high grade circuit kicking in from the March quarter next year?

Niël Pretorius

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

Brendan Ryan – Business Day

So you’ve perfectly lost a year?

Niël Pretorius

Basically a year.

Brendan Ryan – Business Day

And then second question, I mean I crossed my mind back three months ago I remember the last year, you gave a very upbeat presentation the grade was rising, the new plant was working, things were looking great and then six weeks later the roof it was then -- did you have no inkling at that stage of what was coming down the track?

Niël Pretorius

I 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 R6.25. That’s a bit high, I was confident 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 got to deal with, it is not an engineering or a technology issue and then that we didn’t foresee. We did not foresee the impact that in a commissioning this and the middle of the worst rainstorm in so many years was going to have just on densities. These power interruptions, the bottleneck is a consequence of these thickeners tripping and so forth.

That’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 most worked and the flotation circuit worked and we all very much consider, still consider to be the difficult part. The rest is tweaking, it's reconfiguring your metallurgical protocols and configuration.

Unidentified Analyst

Luren Gwinnie [ph] from RMB Morgan Stanley. Can you maybe give us an indication of the expected volumes and the yield that you will have between now out of your conventional low grade circuit until the high grade up of the grinding.

Niël Pretorius

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’re phasing out the Cason dump, and 4A6 dump which is also a sand dump is going to come into the equation and there is also some of the high grade materials going into city. So at this stage, the only estimates that I make on gold production is the one that I get seconds after I receive the production sheets of the morning smelt, they are all after effect and on that we base the costs for the next foreseeable week or two weeks or month.

But 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 and it's behaving the way that it used to.

Okay, the first question is what is the long term growth plan? Has 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 failure substantial portion of our resources and extend that life for as long as the gold price and technologies are mutually supportive.

Off that footprint often improved recovery profile we can definitely extend the footprint, the existing footprint a little bit both towards the east and towards the west and we’re in constant discussions with parties that interest on either side of our footprint to see whether there is prospect of bringing some of the materials into our plants. But that’s going 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 is also considering the company’s reserves, the company only has a 11 year life remaining if it's accurate and I think it's actually less than that. In the absence of the plant coming online this here assuming it never comes online we will probably start a 5 or 6 year closure phase basically. It will 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 DRD Gold has? Could this land become available for sale and has a resale valuation been done on the land?

We’re selling non-core chunks of land as we go along. I think we have got at the moment we have got offers of about R35 million, about R40 million for land but we don’t create any expectation around the resale value. As and when the Elsburg facility has been mined out which is about 8 years from now, there is roughly 300 hectares that will be available for sale and I think the market at that time will determine what it's worth. So we’re not doing an resale valuations, before we do a sale we do an independent valuation and we don’t sell for sell.

How much did we generate in property sales last year? About 40 million. And we have got about 40 million of pending offers as well. Okay I think I answered them all? Yep.

All right. Thank you very much everybody and please enjoy the sumptuous sandwiches that we Lee has very generously prepared for us.

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