DRDGOLD's (DRD) CEO Niel Pretorius on Q4 2014 Results - Earnings Call Transcript

Sep. 2.14 | About: DRDGOLD Limited (DRD)


Q4 2014 Earnings Conference Call

September 02, 2014 04:30 AM ET


Niel Pretorius - CEO


Adrian Hammond - Standard Bank

Niel Pretorius

Good morning everybody. Thank you very much for taking the time to come and listen to this presentation. I know it’s a busy reporting time, so really appreciate the fact that you do take time off. I am going to be covering in addition to what you will see on the presentation, seven particular issues or seven; I think important aspects of our results. Firstly the aspects pertaining to the fourth quarter recovery, I think it’s important that we put that into perspective, we'll also talk a little bit about the findings of the investigations into why the commissioning of the flotation and fine grind was unsuccessful and we had to call a timeout that’s one of the reasons why Jaco Schoeman is sitting here in front with me to deal with some of those questions.

Talk a little bit about the current status of where we are after having started with test work again in the middle of August, elaborate on some of the future steps that we plan to take going forward and some of the contingencies associated with those future steps. I also do want to talk a little bit about, because you will see some of that in the letter to shareholders, I want to talk a little bit about the restructuring both of management and the business. I want to give you an update on the BEE deal, the roll up of Khumo Gold and the Trust into DRD. You will also see that there is a restatement or a restatement rather in the results, so I just want to cover some of those aspects. Acting CFO, Anthon Meyer is here, so he will be able to also assist on some of the questions there that I might not be able to explain adequately.

Yes, I think those are the key aspects that I will cover, as I say in addition to the presentation. So, you are all aware of the contents of the disclaimer that there might be some forward-looking statements made, just have due regard to this disclaimer please. So, jumping right in, these are two very different sets of highlights obviously and they reflect I think two very distinct experiences or periods of operational efficiency and production efficiency in the last 12 months. What you see in the second bullet point, the financial year results, are very much as a consequence of the events of the second and the third quarter when we were grappling with first the commissioning of the flotation and fine grind and then actually starting it up and with production itself.

You recall that in April we called timeout, we decided to suspend flotation and fine grind in order to go back to familiar territory, know more or less what it is that we can rely on in other words what the bankable gold flows would be going forward into the future, also working out what the best timing parameters would be for the recommissioning or new test work phase and that was very much driven by both what we thought amount of time that we were going to need to get to the root of the problem but also because of the very real cost cycles that we have got to deal within the mining industry in South Africa. You all know that we pay -- well, three months of the year we pay winter tariffs and those winter tariffs add between R12 million and R16 million a month to the fixed overhead.

So you can’t have a situation where you are in the time of uncertainty where you have got the additional cost associated with the flotation and the fine grind circuit and on top of that you have got to pay this additional R12 million. So, you have got almost a R24 million additional overhead and not certain whether you are going to be producing the gold necessary to cover that overhead, so it’s a triple whammy for all intents and purposes. So, the timing of test work to a large extent was driven also by this one very important consideration as to when the cost cycle is going to turn more favorably with the end of winter tariffs.

Of course with gold production having been up as much as it was, slightly higher gold price than I think what we had factored into our planning and also managing costs very, very efficiently. Things turned out quite a bit better than what we had anticipated or what we had planned for going into the fourth quarter. And therefore as a consequence, we were in a position to do a number of things, one of those being that we started with test work few weeks earlier than anticipated and we finished the month at a very, very encouraging level.

It also enabled us to pay dividend. I think we had, to a large extent, indicated to the market that because of the cash outflows the fact that we had some debt to retire that we want to maintain a certain buffer, that a dividend was under threat, not really within our means to pay but once again because of the way the things finished, we were in a position to declare a small dividend without distorting any of our considerations or our measures for purposes of distributions to any great extent. After the end of the June quarter, the end of the financial year, we retired the second last batch of loan notes. There was a R77 million cash outflow and that notwithstanding the working or the available cash flow rather as we stand here were such that we were in a position to not interrupt what has been an interrupted dividend flow period of six years. So this would be the seventh consecutive annual dividend.

I think it also plays an important role in the messaging to the market. The fact that we do have confidence in this model that’s why I embrace this model, the technology driven margin focused model, mechanized mining, uninterrupted mechanized mining, managing down the risks typically associated with mining in South Africa. And technology is really where the future for us remains, and I’ll elaborate little bit more about that in the slides to come.

And so, the operating trend, and these are important because I do think that it gives an indications to just the extent to which the fourth quarter numbers represent a real recovery to the levels prior to the commissioning of the flotation and fine grind. So, to give the big best picture really or the best comparison, you can really look at the fourth quarter of ’13 and the fourth quarter of ’14 and there you could see what the volumes have been. So the throughput capacity of this circuit, the ability of our management team to deliver the tonnes in the plant, I think is once again being reaffirmed. You can also see the yield having recovered. And this was direct consequence of improved metallurgical efficiencies. We identify the number of issues in the metallurgical systems, which we have traced, both insofar as carbon management systems are concerned and also maintaining the integrity of the water circuit. It’s important that all of the water that enters the plant stays in the plant. Just on those two issues, metallurgical efficiencies have recovered quite significantly.

There has also been a program of continued business improvement. For example, we've installed linear screens right at the tail end of the plant. So after we’ve done everything that we can or that we want to do with our throughput there is one last filter or one last screen that is designed to catch the last bit of carbon. So this is a mechanical process where carbon bounces off all sorts of other agents and you get little bits and pieces that erode and break off and so forth. So those carbon fines are now being trapped in a screen between the plant and the tailings there. We’ve also installed some solution columns where the water that carries all of the material from the plant and onto the tailings and back again onto the reclamation sites and so forth because you will recall that we have a close water circuit where that goes through instead of solution columns as well. And even there we are also picking up dribs and drabs of gold there in the past we never saw.

So systems and more systems and more systems driven towards efficiency, we use the analogy of a tap that drips once every minute, if a tap drips once every minute then it means that drips 60 times per hour which means that over a day at 60 times 24 over a year that’s a lot of water that ran out of that tap although it look insignificant. With these kinds of volumes with these kinds of sensitivities rather to volume and extraction efficiency it cannot be a single dripping type. And what you see in there is not because of any new technology or better technology or anything that we’ve built or anything that we bought. This is out and out consequence of just taking what we had prior to filtration and fine right just managing it better and putting in better systems and better controls.

There you could see how the kilos have recovered. This was probably our worst month or our worst quarter rather in years in March when we came in at below 300 kilo production for the month was very much our worst production month many-many years and that's what led to the suspension of the flotation and fine grind.

So just looking at the trends we report on these because financial capital obviously is one of the more important capital stuffs that we focus on and that we want to deliver value on. You see that year on year basically we earn benefit this is what’s been happening to the cash operating margins so slight improvement there quarter on quarter but there you could see the difference that R28,000 per kilo in gold price mix notwithstanding the fact that production was pretty consistent if you compare the fourth quarter of the previous year to the fourth quarter of this year.

All in sustaining margin I suppose that’s the beauty of IFRS, sometimes you could take something that doesn’t really impact on your actual costs and factor it in personally I think our pervious margin or measure rather of all in cash costs is more accurate, reflects what it is that we want to reflect. Be that as it may that jumped quite nicely.

EBITDA you can see that quarter on quarter what that difference was so that’s a 650% swing for what it’s worth and then this is an important number before us. Ultimately this is what it’s all about we live in a country or maybe not in a country I think globally times are such that the competition for capital is quite tight. And you don’t really want to spend more than what you could make. So for us this is an important parameter we can’t just rush out into the market and place shares, just going to borrow money it’s expensive to borrow money, if it is just for general corporate purposes which I think is the term you use when you run out of money and you need your shareholders to bail out or the banks to bail you out. If it’s not for a specific purpose, so unless it’s for a specific purpose that you’re going to again raise capital where the project itself pays for itself, you really don’t want to spend more than what you could make. For us that is an encouraging trend, the fact that we’ve reserved these significant cash outflows. 8 million in the previous quarter, 2 million in this quarter and that is out and out as a consequence of better production and better cost management. So you can see we finally managed to break through the line in the fourth quarter worth $0.10.

So by the way for those of you who keep track of these things that's a 251% swing quarter-over-quarter on headline earnings. So this is the good part of the presentation and so far as income statement is concerned all the numbers here look okay comparing the third quarter with the fourth quarter. Operating profits stayed pretty flat but I think we did get less for our gold quarter-on-quarter, representing the fact that revenues were nicely up. And there 394, that is a direct consequence of the higher electricity tariffs that we had to pay. But we finished okay. We made a profit after tax and EBITDA was very nicely up R214 million for the quarter.

But this is the one that does not make for pretty reading, what I have done there is I have gone and I have just analyzed the stock of the two numbers the 260 operating profit and the 680 operating profit of the previous quarter. I have just broken it down for you, 100 million of that is gold price. So year-on-year R28,000 per kilo on average attributable to gold price.

High cash cost 150 million, that’s the cost component we spent R150 million more this year producing gold than what we did last year. And the reason for that simply is that we had the initial commissioning costs and then for several months the actual operational costs, operating costs rather of the flotation and fine-grind. So it’s not as if it’s all of a sudden costing us more to get tons from the reclamation side into the plant or that CIL costs have now skyrocketed or the illusion plant or the smelt house any of those costs have gone up or that we are paying ourselves heck of a lot more on the contrary.

It is because there was this circuit that’s been virtually fully operational for several months, that’s been eating cash and not giving us a return. So that’s where the 150 to a large extent comes from as part of that. And then the lower production the year-on-year lower production accounts for 230 million, that again simply because a lot of the methodological efficiency that we had hoped to achieve actually was reversed when we initially sought it out the floats and the fine-grind.

Those obviously tell us what it is that we need to focus on going forward, there is one that we can’t do much about mainly the gold price, well it’s not on the screen but the gold price, but frankly the gold price is not bad. If you‘re complaining about the gold price of R440,000 a kilo then maybe you need to very seriously consider either your cost base or your ore body, because I do think that if 10 years ago you ask any of us, eight years ago, five years ago you ask any of us will you take the R440,000 a kilo gold price in the year 2014 you wouldn’t have given it a second thought. It is still a very, very good gold price.

When I joined DRDGOLD 11 years ago gold price was R65,000 a kilo. We did a royalty buy out for R85,000 a kilo we thought we overpaid and four months later the gold price hit 120,000 and never looked back after that. You just got to manage your costs and improve your process to such an extent that you can manage or anticipate the squeezing margin. Makes no sense to complain about Eskom or labor or so forth. You’ve got to design systems and a model that can counteract that or else jurisdiction just becomes so unattractive.

So the balance sheet, we’ve maintained a strong balance sheet. That’s a number that -- two numbers that I really focus on here. It's that one there, where the cash position is and the current ratio. I think those still remain fit and healthy and that to a large extent attributable to the fact that the recovery in the last three months up to end of June was a solid recovery.

Well so I do want to talk a little bit about the floatation and the fine-grind or the high grade section. I’ll try to keep it short and simple the way that I explain it to myself. And so what we found after we stopped the floatation fine-grind is that there are certainly things that we needed to do in order to manage our ability to receive and contain water coming into the plant. You'll recall that at the time of commissioning we had three months of uninterrupted water -- uninterrupted rain rather and it was an enormous amount of water that came into the plant. And as it turned out the infrastructure that we had established was lacking and we had to dispose of some of water on to the tailings out of the plant without putting it through the system, without putting it through the circuit and we subsequently found that the amount of gold that was contained in the water in other words the dissolved losses were fairly high, so that was one of things that we had to address the water circuit.

The second thing that we had to address is that because this is a technology driven almost automated process, a lot of our control instruments, a lot of our systems are very sensitive to self-protect. They look after themselves, so there is a sudden surge in power or if there is a dip in power, these things just switch off and then you got to go and reset them. So, there were a number of minor engineering adjustments that we had to make in the float plant itself and also in the thickeners which I had spoken a lot about in the past where we couldn’t afford for these systems to simply just switch off, we had to keep them going.

So auxiliary power units and also slight changes in the design were made through these units to make sure that in future, and we haven't had many of those in the past but we don’t want to talk to investors in the media about our poor results because of power or poor results because of rain or poor results because -- we want to anticipate these things because they are going to happen going forward because they happened in the past. So, we have reengineered some of these and it wasn’t significant. I think if we spent R2 million a month over the last six months doing that it must have been a lot but these we have addressed auxiliary power units and slight changes in the design and that is to accommodate volume throughput and to make absolutely certain that we could, unless there are some sort an of extraordinary calamity event or a total shutdown, that we could maintain volume flow and not interrupt operations for prolonged period of times because of things that have essentially become foreseeable in our industry.

Then it also became apparent to us that there were a number of management protocols that we needed to look into. Carbon management systems needed a bit of management oversight that was independent of just the guy who is there but actually the system that we have in place and that too have almost immediately given us a very good outcome.

So, those were the findings of the investigation. We had them independently verified. It was important for audit committee to make sure that our confidence in this facility going forward was born out also by an independent review. So, we have brought in an independent analyst, we had a look at the design of the system and you recall in the past when I spoke about it that the difficult part of this whole process actually worked quite well.

The concentrate that we managed to get from the float circuit was bang on spec and when we did the analysis of our washed residues, ex post facto which is basically an indication of just how much of the gold remained behind in solids. We did achieve the 0.03 gram a ton improvement through the fine grind system. So, in other words the engineering and the theory behind the engineering all of that was bang on target, it was what we did with that additional gold that had now found itself in solution, metallurgical processes exacerbated by some of the other issues that I had spoken about. So that was verified both the engineering layout, our interpretation of the problems and the steps that we were taking going forward in addressing those and we got the thumbs up to the satisfaction of Chairman of our Audit Committee.

Our current status is, I referred to the fact that we were able to startup a little bit earlier, so one-third of the flotation circuit is now fully operational. We are achieving a flotation concentrate that is consistent with our expectations at this point in time and milling and bleaching or grinding or bleaching has also started and just maybe if I could take one step back. What we have done is we have isolated or separated one specific source of mining material, one-third of the total throughput, we have isolated that. The material that we are sourcing from the Central and West Rand and for the last six odd weeks that one-third has been treated through a separate CIL circuit, separate set of tanks. You will recall that we have two distinct rows of CIL tanks.

So for the last few weeks that single source material has been put through this separate CIL circuit, was separately eluted and right up until just before it in went into the electrowinning circuit, this material was treated separately, that’s our base case. And you will recall that I spoke a lot about test work, I think I may have used the word research when in fact I meant test work that we were going to do test work and that we’re going to do that off a scientifically established base case now that is our base case. One-third of our throughput that’s gone through the circuit, is our base case, we know exactly what the extraction efficiency is of these materials or the source of material and now that same source is going about 600,000 tons a month, is now going through one-third of the flotation circuit, it’s going to be going through the fine grind mills and into the CIP circuit.

And that will give us an indication as to whether the additional gold that we will be treating and recovering through the flotation and fine grind is proportionate and justifiable given the costs of putting it through the circuit and depending on the success that we achieve there and we have very, very clear targets or parameters that will determine whether or not we are achieving success and that is simply that we want to drop the residue grade by around 0.025 gram a ton between 0.025 and 0.03 gram a ton is we want to see a reduction in the residue grades because that will be indicative that this plant is performing to specification as soon as we get that through then we’ll know that we could start sourcing some of the other materials in there as well.

So, looking at the slide again, both circuits working, mills are working, they were working all along. Water balance carbon efficiencies and thickness needed some attention and have been given all the attention that they require and they should be working well now as well. Full extent of the impact of the float reagents I maybe pause a little bit on that. We were concerned that maybe the inefficient performance or the inefficiencies associated with the loaded carbon numbers that we saw has something to do with the float reagents. Float reagents have the ability to cloud your carbon to an extent. The layout of the plant is such that it’s unlikely that it would have that much an effect but in order just to verify these numbers the team led by Charles Symons paid a visit to a mine in Australia where they use very similar technologies just to study in particular the impact of the float reagents. And it’s really is negligible the numbers that he saw there suggests that if there was an effect on the carbon efficiency in the past very little of that was attributable to the float reagents. But that is still part of the test work. We will not speculate about it we’ve done some groundwork we’ve had a look at other people and how they go about their business we’ll do our test work ourselves now to see whether or not that is in fact the case. And then also the extent to which the high grade section impacts on overall recovery. Keep in mind that everything that’s going to be treated in the low grade CIL will have been through the float circuit it’s in effect the float tail that goes into the low grade CIL circuit. And we’ll know when we’ll know but I think we are all cautiously optimistic that we’ll get to the right result.

And so future steps is we’ve started, one third is going through the float circuit as soon as we get to the parameters that we want everyone see we will systematically start introducing more materials into that but we do want to have a scientifically determined set of numbers comparing the float and flotation outcomes with the base case that we’ve established in the past weeks. So we’re looking at about three months of test work during which we will systematically start introducing more and more materials depending on the outcomes. So I’ve anticipated this somewhat. That’s better than steady state. Quite honestly I think some of the business improvement measures that were taken towards the lower grade CIL surpassed our expectations and we were very pleased, very nice to get to the end of the month and then look at the flash report which is our weekly update. And then at the end of the month you’ve got a pleasant surprise of additional 10 kilos or 15 kilos of gold that didn’t form part. So either our reporting has improved or our planning has improved. We’ll see.

The newer high grade material sources supplement deal that’s another important aspect really of the events of the last few months. We have this infrastructure but we’re not going to build a pipeline into every little remote corner of Gauteng because you need a rather large and concentrated deposit before it makes it worthwhile to start sourcing of the materials. But more and more people are looking at where these dumps are situated wanting them to be removed and some of those actually have fairly high grades. And in this particular instance we were very fortunate to strike a commercially sound arrangement with a land owner who is also the license holder of the material to deliver materials over the fence into City Deep plant at a rate of about 100,000 tons a month. It’s not going to shoot the lights up but it’s really one of those additional things. If you add it up linear screens, solution columns, a little bit of a saving here a little bit of an improvement and efficiency there and here this is not water dripping out of the tap, this is cream dripping out of the milk separator, so that’s the good stuff. That’s the cherry on top stuff. And there are more and more of these opportunities. Personally, I think that there is a model here where you could go to some of these more remote areas where discarded or all dumps that have been neglected call some environmental nuisance for the surrounding invariably impoverished communities and maybe there is a model there as well. Its early days but it’s certainly the sort of thing that the management team is looking and it’s come onto the agenda and it’s a discussion point.

What we do want to do and I’ll talk a little bit about that towards the end is make sure that we extend the reach of this operation and make sure that we take full advantage of our very, very significant infrastructure. And then I think the supplier risks have been dealt with and also the carbon efficiency risks have been dealt with. And it’s just systems, systems and more systems, high volume, high sensitivity and something that you will manage with appropriate systems, another test work phase is underway.

I talked quite a lot about the social capital value add, I think in a jurisdiction where we’ve seen just how vulnerable the industry is to the manner in which organized labor is not just organizing itself but also the conflicts that exist, the relatively inefficiency of the dispute resolution mechanisms that are in place the formal ones, CCMA's being ignored, we go straight to the CEO and the minister teams and then these things just get dragged out, because nobody really pays much attention to what the law says.

I think in this kind of environment you cannot underestimate the importance of social capital, not just in so far as your own employees are concerned but also the surrounding communities is concerned. Because that is something that will be a discussion point and more often than not an emotional discussion point when things get a little tight. So we fortunately have a team that I think are fully committed and fully appreciate the significance of this for the right reasons. And for many years now five or six years we’ve been paying down the building blocks of what I do believe is a relevant and a dynamic process aimed at improving the lives of employees, giving them quality of life. That’s why we call it best life.

And best Life is really the fourth iteration of something that’s started out as the think campaign, just think what the values are that you want to bring to think what it is that you want to gain out of your involvement with this organization. And we think it’s important.

Our employees are now starting to get or undergo financial literacy training and it’s really to assist them to make sure that what they receive at the end of the month is enough not just for now but also going into the future. If you insist that you are not overpaid and that your employees are not underpaid then you got to make sure that what they need in order to survive skills and the understanding of what it is that they need to do, that those are offered, or else I think that your argument as to why things are the way that they are might sound a little hollow.

In addition to that we also remain very focused on youth education, for many years now we’ve had a program for metric pupils in and around our operations. 531 students have enrolled in these programs, we saw the 2013 metric average pass rate in some of these schools go up from 58% to 85% year-on-year for math and science. And this is not the [indiscernible] this is real maths, it’s not math literacy. And it’s amazing to see just how these pupils respond, pupils who have had very little at their disposal, very little means how they respond just to the opportunity to do well.

This is now being rolled out into accountancy clauses as well and we hope to see similar results coming out of that. And then you all know about EBDA which is our community college, it’s actually a business academy but it also has a community college elementary. We offer recognized trades and they too community members have taken advantage of some of the open enrollment courses there and there you could see the numbers and the successes. And now the challenge of course is to assist the students that have graduated to finding employment. Personally I also believe that there is some work left for us to do to see whether our curricula or appropriate whether they are relevant, whether we are really delivering into the needs of those communities into society, I’d like to see where do community members spend their money, there is this wave of social grant money coming into these communities every month. And the teams saw that money is not spent there and the townships, that money is spent elsewhere.

So it goes from tax payer to government to social recipient back to tax payers. It’s a very small loop or a closed circle. You want that money to be spent three or four times in that community. So I think we’ll be doing some needs and analysis in those communities to see what it is that those members, community members buy outside of the townships. And maybe the collaboration of EBDA and our own corporate social investment could do something that could benefit those as well towards local economic development.

It’s not the sort of thing where you can go and create the market, what might seem like a brilliant idea in a corporate office not necessarily a brilliant idea in the townships. You want to go and see what the actual market opportunities are. I think those are the businesses that you want to stimulate regardless as to who -- maybe that’s far I should go with that. You want to see what it is that people spend their money on where they spend it and see if you can bring, by spending closer to where the money is received.

On the environmental capital value add, I think this also has become a very important aspect of the business because this, notwithstanding the fact that sustainable development has become very much part of our strategic corporate thinking, we follow an integrated thinking model. You cannot do business in the middle of Johannesburg if you can have clouds of dust covering the communities that live around your reclamation and deposition areas. You’ve got to manage that effectively.

Up until last year we on average spent R80 million a year for five years in a row on vegetating and rehabilitating various tailings dams and depositions sights in and around the Johannesburg area. And we’ve now seen the results, those results coming together and since that the dust exceedances, I don’t think that word really exists but we have manufactured it. The number of times that we actually exceed the dust emission levels imposed by the regulator have come down year-on-year, this in one year by 57%, so it’s all coming together now. The tops of most of those tailings dams have been covered. The size of most of those tailings dams have been covered or recently I think there are three or four sites in particular where the work that’s been done is absolutely world-class. I invite you to go and drive past them now in the middle of winter. Go and drive past have a look at the Homestead dump which is directly adjacent to Soweto on the northern side of the highway.

And you see what that slope looks like whether it’s been vegetated that is I think the measures that are required to make sure that you don’t have interruption from the regulatory perspective and cause inconvenience to communities who don’t really deserve to be inconvenienced because development and living conditions have been sort of reactive. They were to a large extent moved there and I am particularly proud of the fact that we have had this trending overtime and I have got to give credit also to the management team who have taken this on-board in the last six, seven years. I remember the first budget after I was appointed MD of DRD SA years ago, seems like a life time ago. For the first time ever I saw a budget number included R16 million for dump rehabilitation.

Never seen it before and Henry sitting there, he was the guy who brought that onto the budget and I think we are seeing the outcomes of that now finally. It’s a long process but consistently we move in the right direction, when we had a little bit more money, we spent a little bit more money and now it’s starting to come together. I speak about sustainable development quite regularly. We want to achieve overlap between the value created of these various capitals and I think one of the opportunities where that is the most available is on water usage. We don’t want to compete with Johannesburg and so far as water usage is concerned, we want to reduce our requirement for portable water, the water that comes through Rand Water Board.

Jaco has been working hard with the local municipalities and also with TCTA to source alternative grey water. And as it turns out this water is going to cost us heck of a lot less than what portable water is going to cost us. Jaco, I think this 22 million, once it’s up and running has got a pay back of less than a year, if I am not mistaken. That’s ideal, I mean you reduce your load on the natural environment, you longer compete with something that is really scarce, you take something that’s been recycled, stick it into your operations and the bottom-line benefits. So, I'd like to see more overlap like that, I think that’s where the beauty and the wisdom of sustainable development really comes in.

And then we have returned in total about 215 hectors of land that is cleared for development, most of that belonging to other companies. We are starting increasingly though to start opening up our own land as well and that obviously will go back into the economy for development. So, looking ahead I think I have spoken extensively about what we want to achieve with the high grade section and getting that up and running again. And I also mentioned the fact that we want to extend the reach of Ergo through collaboration and acquisition. We are really now where we wanted to be nine months ago because the flotation and the fine grind for us is the catalyst to the new opportunities that we believe our model may unblock.

I think the economies of scale of our business could be significantly impacted by just how efficient and effective this technology turns out to be. And both our existing footprint reach will to a large extent be determined by and influenced by how efficient this technology is and also the extent to which this is technology that we could transplant somewhere else. But we are fully committed to a technology driven business that makes it cheaper and easier to extract gold from tailings and thus maintain healthy buffer between the revenue line and the cost line and that we will continue.

Now just a little bit on the restructures, we have had some management restructures as well. You will see in the letter that I wrote about some of the costs that are being saved. Firstly, once our lease expires, no longer be occupying a premises away from our operations. We are going to be moving into, I am talking about the corporate office. We are going to be moving into the old Crown general offices. The number of professionals that work for DRDGOLD corporate office also reduced by I think to some 26% and I think the saving on payroll year-on-year is going to be about R12 million. And so far as the management structure is concerned, we have also made a number of changes. Jaco Schoeman has been appointed Operations Director of Ergo and he is essentially responsible now for both operations and also the business development aspects as a combination of the former COO portfolio and his own portfolio.

Charles Symons who has been at the helm operationally of the business for many, many years, has taken a sideways move. He no longer delivers into the operational target mandate but has taken an oversight role and he has agreed to do that for at least two years. We might be able to convince him to do it a little bit longer, depending on circumstances, but essentially what he will be doing is overseeing the implementation of the strategic imperative of this business.

On a quarterly basis over and above the other activities of mentoring and transfer skills and so forth on a quarterly basis rather on a monthly basis here we’ll call a meeting where each of the heads of department will report on progress on the strategic aspects of this portfolio and I’ll remind you that we have specific responsibilities dedicated or allocated to the specific individuals around social capital, human capital, major capital, technology capital and financial capital and those are the reports that he will see. And he will them compile a report that goes straight into the board. So it’s I suppose it’s as close to a supervisory advisory board position that you could probably get and we think that we will derive great benefit from him having assumed that portfolio and driving it.

And so far as the corporate office is concerned, we’ve scaled that quite significantly as well. They will with effect from the 1st of January only be three professionals in an executive capacity as part of the DRD corporate office and then with the CEO, the CFO and the legal counsel the rest of the operational requirement and strategic requirement of the business is now 100% being accommodated at Ergo. We think it’s going to work well, it has certainly been seamless in the way that it’s been picked up and carried forward by all of my colleagues the numbers are anything to go by and it thus seems as though it’s working.

Then just very briefly on the BEE deal, the updates everything that we have to do from a regulatory perspective and internal perspective it’s being done and it’s now matter for the Department of Minerals to consider the application and decide whether or not they’re happy with it. I think when the new minister was appointed recently it was an affirmation almost of the importance of the goals set in the charter. And I think maybe between the office of the minister and the office of the administrator there is going to be period of time required for them to basically just understand what exactly it is that the minister requires and what the administrators needs to deliver into. So, we foresee that that could take a bit of time for them to get the policies and the practices sorted out and understood and then for us to make our submissions. Our submissions are pending before the department but we don’t know when we will receive an answer it might be weeks it might be months. But we’ll keep an eye on it and we'll report as we go along.

And then I want to very briefly deal with the restatement and Anthon please interrupt me if I get this wrong. But essentially what has happened is that DRDGOLD established a sole captive into which it’s been investing now for a few years as part of the cover for its rehabilitation obligations. And it’s more the premature rehabilitation obligations if there is a premature closure then we need to make available a whole lot of money and that needs to cover the cost of rehabilitating. That’s still captive as always been consolidated and being part of the assets of DRDGOLD. But in terms of the accounting treatment the revised accounting treatment guideline that came out that sole captive is not considered to be under the control of DRDGOLD because it’s really under the control of the insurance company that provides the facility. So that insurance company establishes many sole captives and these sole captive is dedicated to a specific corporate entity or a specific operation.

In the past we consolidated it because we would deem to have controlled the sole captive. Now IFRS is saying you don’t control the sole captive the insurance company controls the sole captive. So as a consequence we had to deconsolidate it and recognize a claim in favor of the underlying subsidiary so something that used to belong exclusively and solely to DRDGOLD namely an asset is now been reduced to a claim in favor of Ergo Mining and Ergo Mining has three shareholders DRD, Khumo Gold, and the Employee Trust. And we now have to recognize equity participation in favor of the -- we can no longer talk about the minorities, it’s the non-controlling shareholders or the non-controlling interest in proportion to the equity that they hold in Ergo.

So what you have basically seen is an adjustment in the equity participation of the non-controlling shareholders in a claim in favor of Ergo doesn’t have a cash flow impact, it doesn’t have any effect on profits, it’s probably not material, we had a very long discussion about whether or not this is material enough to be mentioned at all. I think we prefer to err on the side of caution so we decided to tell the market about this adjustment that’s going to take place retroactively with effect from the date on which this change in accounting treatment came into effect. And I think that’s really all there is to be said about that more than that is beyond my grasp and understanding of accounting treatment so I am sure Anthon would be happy to deal with it.

So to wrap up basically it’s a year that we kicked off with huge expectation because we had a phenomenal role for three-four years of good profits, dividends, share price went up 70% and so forth and then we just didn’t get it right when it came to the commissioning of our new technology, it’s necessary for us to take one or two steps back. I think we have now reestablished a very sound platform one that I certainly have lot of confidence in and from which we can now launch our technology.

I said earlier and I’ll say it again our commitment to technology is complete, it is the one thing that will enable us to not just only maintain margin but also expand the reach of our business and extend the life of our business. And we will continue with it, we will continue with our research and development as we go along, because that for us ultimately will be real growth.

In addition to that and that I cannot leave out, we do have surplus capacity in our plant and we are not going to just lie there idly without taking advantage of that. So we’re hoping to achieve the best of both worlds. Once our reliance on potable water reduces, we think we can start also, we can start pushing a little bit on the volume side. And Jaco and the team have all sorts of plans as to how they could do that.

Hopefully a year from now when we do this presentation we’ll be in a position to report a successful test phase and a successful integration of the floatation and fine-grind to our circuit. And hopefully these numbers that you have seen here are really the base case from which we could now gain momentum and grow both the production and also margin.

Thanks very much. We’ll take your questions.

Question-and-Answer Session

Adrian Hammond - Standard Bank

Adrian Hammond from Standard Bank. I have three questions for you. Firstly, I want to talk about yields a bit more. In light of the fact that you're sourcing new high grade dumps, and let's assume for a moment that you achieve the efficiencies you want out of the new circuit, what are your expectations for yields for the next year and beyond?

Niel Pretorius

I think our target remains in the region of about 0.195 yield per ton, maybe a little bit higher. But new resources come in and older resources are being phased out, I think that’s pretty much where we want to benchmark our recoveries.

Adrian Hammond - Standard Bank

Secondly, just on the rehab provision that's being adjusted downwards. Is there any future cash flow impact regarding financing of that provision while that's being reduced?

Niel Pretorius

Are you talking about the rehab?

Adrian Hammond - Standard Bank

Rehab provision, yes.

Niel Pretorius

The reduction in the rehab provision is based on two very specific new interventions in the way in which we approach the rehabilitation. So it’s an actual saving that we recognized and recognized to the satisfaction of all of those as scrutinize it for integrity. One involves the irrigation of the dumps if I am not mistaken. And I forgot what the second one was. The irrigation of the dumps is the most significant one but there is a second one too. But these are two very specific initiatives aimed at managing the exposure to future rehabilitation costs.

Adrian Hammond - Standard Bank

In terms of your financing, finance costs for that provision, is there any impact?

Niel Pretorius

We haven’t provided the full environmental impact just yet, on one let’s call it a collection of assets the crown assets that are now being incorporated into the Ergo Mining right, there is an outstanding guarantee, that’s going to be put in place. We’ve managed to secure a cover for that but we haven’t put it up. We haven’t paid anything in the past, so it will be a first time that we're going to that. So there is nothing to adjust, it will be…

Adrian Hammond - Standard Bank

And then thirdly, just could you give us an update on the announced sale of ERPM and what your intentions for that proceeds would be?

Niel Pretorius

There hasn’t been any change from the announcement that we released, so the dates and the timelines of delivering into the various conditions have not changed. I think proof of funding is due for October, proof of funding is required and that’s really going to be the trigger. I think once proof of funding is in place the rest should go smoothly.

We will treat with in event that this transaction takes place, we’ll treat the cash the way that we’ve been treating our cash in the past. We’ll look at the capital requirements of the business, what’s necessary for that, the amount of cover that we think we need to keep in place on top of cash flows which would hopefully be positive cash flows would be considered. The buffers that want to maintain and if we have surplus to buffer and immediate capital requirements then the money goes to shareholders in one way or another.

I think I actually got this question by email so my apology firstly to (Mr. Donald) [ph] to not replying earlier. Question is will you consider applying any of the proceeds of the sale of ERPM to buy shares back. I will tell you what the approach was in the past when it came to buybacks. As we will take a look at what the consensus view of the stock is, people like Alan would express their views to what the share is. And I think in one of the previous occasion that was specifically used as a benchmark and if the share price is significantly below what the consensus view is of where the share ought to be then it makes perfect sense to buy shares back. It's not to say that we will use the proceeds for that, I think I explained now in response to Adrian’s question, how we are going to be treating surplus cash flows if it does materialize but it’s certainly something that the Board will consider.

And I don’t take those decisions, we go to the Board meetings and we make representations to the Board and we always look at what is the most effective way of distributing or making a distribution either by way of dividend or buyback. And share price at the time is very important consideration for purposes of deciding on a buyback. I don’t think I made any promises here, I don’t want to be told that I promised to buy shares, so there is a process and there is a specific test or a set of parameters that we use for that purpose. Adrian?

Adrian Hammond - Standard Bank

[Indiscernible] expectations on capital for the next year, do you have any new projects in sight? Because effectively now your balance sheet is looking very good. You don't have any imminent projects, your ultra-fine-grind's come to an end.

Niel Pretorius

I think the extent to which we can tackle new projects will be determined to a large extent by just how effectively we test the fine grind because something that might seem distant now which we may want to acquire just for strategic purposes may actually be a reality, something that we want to bring in sooner rather than later. So, we are always looking at new sources especially the large concentrated ones which we may want to bring in. We are in discussion with a whole host of dump owners and land owners on an ongoing basis but it’s really timing. And timing is determined by simple exercises to whether or not it will make sense. If the gold price stays where it is and if the fine grind works as well as what it should then I think we would want to maybe expand our reach and expand it into a larger resource, provided we can get it, not everything you want for sale, sometimes you get lucky if you try hard enough.

All right. Thank you very much everybody. Appreciate your time.

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