DRDGOLD Management Discusses F2Q13 Results - Earnings Call Transcript

| About: DRDGOLD Limited (DRD)
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DRDGOLD (NYSE:DRD) F2Q13 Earnings Call February 12, 2013 3:00 AM ET


Craig Barnes – CFO

Charles Methley Symons – COO

Henry Gouws – General Manager


Allan Cooke – JP Morgan

Adrian Hammond – BNP Cadiz

Chris Nicholson – RMB Morgan Stanley

Craig Barnes

Okay, good morning ladies and gentlemen. Welcome to our December results. Just upfront, I’d like to apologize for Niël. Unfortunately, he couldn’t attend today’s results presentation. He unfortunately has a family bereavement that he needs to attend to, so our thoughts are with him and his family. I am sure he would have loved to presented these results which are really good sear results as you probably seen already.

Okay, that’s our disclaimer. Just to get straight into the highlights for the quarter. I think a lot of people have been waiting to hear what we were going to do about interim dividend. Is that sound working properly? Is it okay? And I think no surprise, the Board decided to declare an interim dividend of 14 cents per share. You’ll recall in our dividend for the full-year 2012, it was 10 cents. So this interim dividend is obviously a very big improvement on last year’s dividend. And it came about obviously as a result of the very good results that we’ve presented over the last two quarters.

We’ve said before to the market that we would be targeting roundabout a 4% dividend yield. I think if you do the numbers and you assume that we’re going to pay a similar dividend in the second half of the year, we’re pretty close to that number. And I’ll probably find that we’re amongst the largest dividend payers in terms of the yield in the gold industry in South Africa.

Our production was up 9% for the quarter which was an exceptional result for us. Just over 39,000 ounces and I think it’s pretty much in line with the guidance that we’ve been putting into the market. That was largely driven by an 8% increase in our throughout into the Ergo plant. Those volumes are setting at roundabout, or just over 6 million tonnes per quarter or 2 million tonnes per month. I think it’s pretty much in line with the guidance as I said.

Revenue up 10%, that would be a function both of the increase in production, as well as the 7% increase in the rand gold price during the quarter to just under R480,000 a kilo. And obviously the higher production has assisted with our cash costs which have decreased by 12% for this quarter and sitting at just above that psychological level of US$1,000 an ounce. If you look at the aggregate costs, you would see they remain pretty steady, maybe a slight increase over the quarter, but really assisted by the increase in production.

Operating profit for the quarter was up 37% to just under R240 million. And that just again shows our sensitivity of gearing to the rand gold price. I know a lot of analysts have asked this question, how does the gearing work in our company but basically a 10% increase in the rand gold price would mean that operating profit or EBITDA would increase by roundabout 26%. And 20% increase in the rand gold price would result in a 54% increase in our operating profit. So as you can see, our numbers are very sensitive to the rand gold price.

Our headline earnings per share for the quarter was up 25% 25 cents, and you’ll recall in the previous quarter, we had received a dividend from Village Main Reef of approximately R26 million, which if you strip that out of the previous quarter’s headline earnings per share of 20 cents, the amount was about seven cents. Then the headline earnings per share increased for this quarter is actually more spectacular at 92% up.

Some Ergo trends, I think that’s the Elsburg tailings facility, Charles?

Charles Methley Symons


Craig Barnes

That picture. In terms of volumes, as I discussed on the previous slide, you can see that our volume really drove our increase in production. Our volumes sitting at just over 6 million tonnes per quarter now, over the last quarter. And that’s really as a result of the stabilization now at Crown-Ergo pipeline. You’ll recall that in the fourth quarter of 2012, we saw a bit of a dip in our tonnages and that was really when we were decommissioning the Crown plant and switching out all those volumes to our Ergo plant. We’re now happy that that circuit now appears to have stabilized and we are comfortable with those tonnages coming out of Ergo.

The same with the grades, really for the some of the reasons we now see our grades stabilizing in around 0.20 grams per tonne. Similarly in the fourth quarter of 2012 we had a slight dip for the same reasons, the decommissioning of the Crown plant and the transfer of those volumes effectively to the Ergo plant, but it now seems to be stabilizing within our guidance of around 0.2 grams a tonne. And obviously that resulted – both the volume and the grades resulted in a 15% increase in production year-on-year or compared to the second quarter of 2012.

With regards to our project, our large project that we currently are busy with, the flotation/fine-grind project at Ergo, which is really about trying to improve the efficiencies within the plant and approve the recoveries out of the Ergo plant. All four mills have been delivered and are now being installed at the Ergo plant. We are scheduled to begin commissioning as the schedule down the bottom shows. Commissioning of the plant, middle of February and our production is still on track to – or we are slight on track to achieve full production, ramp up our production in the first quarter of 2014 in July. We still have roundabout R94 million that needs to be spent on the CapEx and that will be spent over the next two quarters.

Group trends, just some trends again that we’d like to highlights and these are key indicators that we focus on as a management team and a lot of these indicates as in these criteria, these performance criteria of what management is measured on in terms of our performance bonuses and also other incentives that we as management receive.

You can see that our operating margin has now increased to 41% and that was largely I mean driven by obviously the 7% increase in the gold price and also the 7% reduction in our rand cash costs. Just another trend that I want to maybe highlight which you can actually see pretty clearly on here. You can see that in the fourth quarter and also the first quarter of 2013, in our operating margins and that, I mean some of the reasons I have already mentioned that was the switch over from Crown to Ergo, decommissioning of Crown. But there are also other factors that impact those two quarters, the fourth quarter and the first quarter and that’s really on the cost side.

In the fourth quarter of every year, we always going to see these winter tariffs supplied by Eskom which obviously impact our costs and that’s over a three month period, one for one month in the fourth quarter and for two months in the first quarter of every year. Another factor that we see in the fourth quarter is the electricity price increases generally coming in roundabout April. So those are just factors with regard to costs that we need to consider when we’re forecasting going forward.

Our EBITDA was up 22% compared to the second quarter of 2012 to R172 million. Again I mean that would have been impacted up by the higher production and also the higher gold price, but you can also see those trends, again the fourth quarter and the first quarter obviously EBITDA being impacted by the same factors.

Headline earnings per share, up 67% compared to the second quarter of 2012 to 25 cents, again in that 20 cents was seven cents relating to the Village Main Reef dividend. If you strip that out, the increase quarter-on-quarter was actually in excess of 90%. Our free cash flow which is something we monitor very closely and again it’s a key factor on which we are measured as a management team, you can see that we ended up quite well for the second quarter at R112 million.

You must remember that we’re spending obviously a lot of money on the capital – on the Ergo flotation and milling circuit. So even in spite of all the capital we’re spending we managed to generate a positive cash flow of capital. We also in this last quarter we had to pay a dividend, the previous dividend of R40 million, it R30 million that was repaid on our previous loan notes. And if you recall we also put out an announcement about a buyback of share options of approximately I think it was R24 million. So even with all of those outflows of cash, we generated a positive cash flow for the quarter.

On the income statement, you can see that our revenue was up significantly, 25% again on a higher rand gold price and also on an higher production compared to the second quarter of 2012. Costs which obviously is a topic of discussion within the industry and also within our company increased – net operating costs increased by 25% but you must remember that our volumes have also increased by 16%, so a large chunk of that increase in costs is driven by the increased volumes that we’re now processing through the Ergo plant, as well as obviously annual price increases year-on-year for electricity, wages, and also consumables which we’ve seen rising recently.

That left us an with an operating profit for the quarter of just under R240 million, up 26%. Our depreciation number is slightly up which you would expect because of new infrastructure, the Crown-Ergo pipeline which was completed towards the end of fiscal 2012 which is now being depreciated. Other numbers I want to highlight, the profit before tax, up 33% to R143 million and then headline earnings per share as we’ve discussed up significantly to 25 cents for the quarter.

On the balance sheet, just on non-current investments and other assets included in that R140 million odd on our balance sheet is Village shares that we earned which over the last quarter did increase in value slightly. There is also Rand Refinery shares in that number.

Cash and cash equivalents basically stayed at around remain at around R400 million and that was largely due to obviously the capital that we’ve been spending at the Ergo flotation milling circuit. And all the cash items that I mentioned on the previous slide, the dividend that we had to pay, the loan notes that we repaid, as well as the buyback that we did of options.

And again you can see under the long-term liability line we raised, we completed a capital raising in, I think it was September where we raised a R165 million in terms of bonds, loan notes that we issued and there was a repayment of R30 million on loans that we issued in previous years. And that is really the only interest bearing debt that sits on our balance sheet. Our current ratio, you can see has improved which we would expect with obviously the good results coming through.

Okay, on ERPM I mean we’ve been talking for a long time. As a management team we’ve been looking at various options of trying to extract value for ERPM. What we’ve decided on and what’s possibly going to be the best root for us as a company is to really package the different assets within ERPM, ERPM Extension 1 and 2, which is a significant resource of 21 million ounces, as well as the Cason Shaft which was an old shaft at ERPM – in the old ERPM mine working area where we spent approximately R25 million on upgrading the plant to 6000 tonne per month plant. That’s basically based on the old ERPM plant footprint and also refurbishing the old shaft and working areas.

Now the idea there is, I mean we’re spending on average about R2 million a month at ERPM just to really on care and maintenance and maintaining the ERPM footprint. The idea there is in terms of our strategy obviously our focus is on surface re-treatment. We believe that we can generate short-term cash flows out of the Cason Shaft, which will mean that ERPM as a separate legal entity is self sufficient, we weren’t need to fund that anymore and it can also assist ERPM in funding the exploration that needs to take place in terms of ERPM extension 1 and 2, the 21 million ounce resource.

So we’re looking to package those assets and with the intention of disposing of them, obviously they don’t fit into our post strategy which is surface re-treatment. On Zimbabwe, we’ve completed exploration drilling at most of our sites, our exploration areas. What we’ve found is most of them are – will let themselves to underground mining which again does not fit in with our strategy. Our focus is on surface re-treatment as I’ve said and we are now going to be looking at packaging those for some type of disposal.

We are continually looking at obviously the viability of some surface dumps there, so we’ll continue to look those because that again that fits in with in our strategy, our stated strategy. Okay, on rehabilitation, obviously a major focus of ours is our environmental obligations and also rehabilitation. And this has become a major issue for us recently because we’ve obviously decommissioned the Crown tailings facility as we now – what happens when you decommission a tailings facility, the dams tend to dry out and there is potential for dust pollution. So lot of money and a lot of effort is going into really sorting out the rehabilitation of the old Crown tailings facility.

The area that we’re looking at is about just under 132 hectares, that includes the surface areas as well as the slide slops. Obviously our primary objective is to control the dust in that area, I mean if you look at way in that picture those dumps are located, very close to residential areas and also you can Soccer City in the foreground of that picture. So it is a very important initiative of ours. And the guys at the operations at Ergo come up with what we believe is a very effective 5 Point Plan to look at controlling the dusts over those dams.

In this year’s budget for fiscal 2013, we’ve budgeted around R23 million. We plan to spend about R10 million to R12 million per annum. Thereafter, hopefully that number will come down at that time because out of pressure there, to manage that down but timeline in terms of this project is to – because the top surfaces have dried out, you can see in the picture there that there is a lot of grassing still on the sides slopes. Our immediate focus area is obviously the top surfaces and we plan to complete those by March 2013 and then focus on the side slopes and have that completed by 2019.

We’ve created about 40 jobs drawn from the local community around that area which involved in obviously the planting and maintenance within that project. These are basically the five points that we’re focusing, or that the Ergo operational guys are focusing on. Obviously they need to repair and vegetate the buttresses. They are limiting the berm use for maintenance vehicle access and looking at watering those areas and cladding them with aggregate material. The side slopes are being vegetated and if drive past the Crown tailings complex on the highway going out towards the Soweto [ph] at towards Soccer City you can see the work that’s been done on those complexes including the side netting and also the vegetation from the highway, if you drive past there.

The focus area on the top surface area of the dumps is to flatten the day walls to improve if and also to allow for the side net or the netting that they’re putting up there and also vegetation to facilitate that process. And then the last point that the guys are looking at is obviously again the top surface area, you can see the wind-breaks from the highway and you can see how the vegetation is taking to those top surface areas. And we’re pretty confident that we’re doing a – the guys are doing a very good job there and that we could managed to control the dusts coming off those dams.

Okay, just looking ahead in summary, our key focus areas going forward. Obviously key focus areas to maintain the volumes that we’re seeing coming out of the Ergo plant now. We believe we’ve reached stability and we hope to maintain the 6 million tonnes per quarter or just over that which is in line with our guidance. As I said in Feb, this month, we start commissioning the flotation/ fine-grind circuit and obviously that is a key area of focus over the next couple of quarters as we ramp up to full production in July.

In Zimbabwe as I mentioned our idea is to clean up what we have there. They are not – the ashes don’t exactly fit into our strategy and we are looking to disposing off those assets, packaging them and disposing of them. We’re going to be moving on ERPM, we’re going to – there is a serious effort now to try and extract value for those assets. It’s the last remaining underground assets really in our portfolio.

We’ve took care of Blyvoor [ph] in the previous fiscal year and our focus is really going to be on ERPM and looking at disposing as I’ve said packaging those assets as various assets for disposable but the idea there is we’re not going to be putting more money into ERPM. It needs to be sound sustainable and it needs to be packaged as quickly as possible and we need to extract value as quickly as possible for our shareholders.

There are other initiatives with which Jeneker [ph] and his team are working on and also the guys at Ergo and securing additional water supply. We’ve made use of lot of water in our Ergo circuit and the focus there from an environmental perspective is to make use or less use of rainwater and more use of potential grey water which we can maybe obtain from some of the sewage firms around the footprint, as well as AMD, potentially utilizing some of that. And that will also have a knock-on impact in terms of costs as well. Obviously that water will be a lot cheaper than rainwater board but the major focus as I said is on environmental issues there, to make use – less use of rainwater board or portable water.

Our EBDA initiative, the Ergo Business Development Academy has been very successful for us. I believe we’re making a huge difference not just in the communities around our Ergo footprint but also with our own employees. And the idea is to obviously extend that EBDA footprint as much as possible and continue to benefit the communities and also employees as well through initiatives that we run through the EBDA, the academy.

We’re also launching our Best Life initiative, which is an employee development program focused on I suppose the values within our company, health issues, educating our workforce in terms of financial literacy and just equipping them better so that they can deal with life going forward and also within the context of our work environment as well. And that’s basically, I’m sure that’s a lot shorter than what Niël would have done today because he likes to talk a lot more than me. So I am going to open the floor out for questions and maybe some of the operational guys will also assist some of the questions.

Question-and-Answer Session

Allan Cooke – JP Morgan

Hi Craig, it’s Allan Cooke from JP Morgan.

Craig Barnes

Hi Allan.

Allan Cooke – JP Morgan

Could you just help us out so the balance sheet, the Village shares that you’re carrying on your balance sheet is that – how many and at what price you carried them at and then still waiting for the remainder of those shares to come through, what are those numbers again please?

Craig Barnes

Yes, I think it was just over 85 million shares, (inaudible) is that right, 85.7 million shares in Village if I recall.

Allan Cooke – JP Morgan

Is that on the balance sheet now?

Craig Barnes

That’s carried on the balance sheet. Although if you recall 20 million of those shares, we held in escrow until the final conditions precedent of the transaction took place and that would be basically the Section 11 approvals and consent from the minister. So once that has been completed and we get ministerial consent or those conditions are waived that’s another option then those 20 million shares will be released.

Allan Cooke – JP Morgan

Okay. But it’s great that you guys have paid an interim dividend, but in line with your strategy, you’re cleaning up Zimbabwe and looking to extract value there from the underground potential, it looks like you want to exit finally ERPM and any underground operations there but you slicks first through your Village holding to underground, deep level hard rock marginal underground mining in South Africa. What are the hurdles to you on bundling these shares to your shareholders? Is there any reason why you need to hold on to them or could they be distributed to the DRDGOLD shareholders? Please.

Craig Barnes

Look I think the major considerations for our Board, firstly the 20 million shares in escrow, well they could argue we could distribute the remainder or the balance of those shares already because there are no restrictions on those. I think the intention was because the share price in Village dropped, we were hoping that would recover and we could extract more value from that, but that is a topic of discussion in our Board and I think over the next couple of quarters, we’ll decide – and those are the options, we could potentially unbundled them to our shareholders or we could disposal them outright.

Just we didn’t want to dispose of those shares when they’ve dropped in value, it doesn’t makes sense. We obviously wanted to get the value that we initially the shares were issued but I think over the next couple of quarters, we’d probably have more clarity on it, from our Board.

Allan Cooke – JP Morgan

Okay, thanks Craig.

Adrian Hammond – BNP Cadiz

Hi Craig, Adrian Hammond, BNP Cadiz. Craig, just with regards to ERPM, what sort of value do you place on these assets?

Craig Barnes

Look, obviously I am not going to discuss value because we’re entering into a time now where we’re going to be negotiating potential values. But I mean there is various valuation models you can run on a 21 million ounce resource, I mean you guys as analysts would be quite familiar with placing a value on specific ounces. Obviously if you’re going to build a mine at ERPM, there is significant capital that would need to be spend, so that needs to be factored into any calculation of value. But I mean we believe there is a lot of value to be extracted for this asset. It just – for us the reasoning behind as we’ve been talking about previously disposing of that asset is it doesn’t fit in with our strategy.

So one of our last remaining underground assets, we need to extract value for our shareholders, because of it is an asset we own and those are the ones that we really need to focus on extracting short-term value for our shareholders. Sorry, I can't be very clear on the value.

Adrian Hammond – BNP Cadiz

That’s great.

Craig Barnes

But they do have significant value I believe.

Adrian Hammond – BNP Cadiz

And just looking forward was ultra-fine grinding coming on stream next year with a potential uplift to your production, what is the impact on your cash costs from the ultra-fine grinding plant?

Craig Barnes

Well we’ve said previously I think the guidance we put out was roundabout R7.56 per tonne, is that correct, that’s still the number that we’re looking at. So there will be an impact on the costs, and you can calculate that number.

Adrian Hammond – BNP Cadiz

Thanks and one last question just on you rehab of Crown tailings dam. You’ve indicated you’ll get the top slopes complete this year but the sides slopes in 2019, why so long for that?

Craig Barnes

Okay, that’s a very technical question so maybe Henry can give a little bit more clarity on that one.

Henry Gouws [ph]


Adrian Hammond – BNP Cadiz


Craig Barnes

Okay. Any more questions?

Chris Nicholson [ph] – RMB Morgan Stanley

Hi Craig, sorry Chris Nicholson.

Craig Barnes

There we go.

Chris Nicholson – RMB Morgan Stanley

At RMB Morgan Stanley. Just wanted to ask you around the tonnages and the throughput, how close is that to full capacity of the pipeline and what the plant can take, and kind of the read through for that going forward in terms of those volumes?

Craig Barnes

I would say I mean the Ergo plant, the current capacity it is 1.8 million tonnes per month. The balance of 200,000 odd tonnes is coming from the Knights plant. And within our guidance between 2 and 2.1 tonnes per month is what we believe is capacity there currently. Obviously the Ergo plant when it was previously owned by Anglo had a capacity of 2.4 million tonnes per month, but I mean we haven't as a Board made any decisions in terms of increasing that capacity as yet, obviously our focus was on improving efficiencies at the plant first which makes sense, before you increase the capacity you need to make sure you have the most efficient plant.

So there is potential down the line to increase capacity. I just don’t think that’s going to be our focus as yet. I think we need to make sure that we Crown – I mean sorry, that the Ergo flotation milling circuit delivers into what we expecting it to deliver, the efficiencies that we are expecting. I know that Niël feels very strongly about with some moderating capital going forward for at least another year or so, so not spending a lot of capital on big projects. And I think down the line we’re not going to be in a rush, we’ll make a decision on that down the line.

Chris Nicholson – RMB Morgan Stanley


Craig Barnes

Okay, there is a question we have from online. In case of a double dip and if there is no recovery, which is bad for financial markets, investors will obviously turn to the best hedge which is gold, which is incidentally good for gold industry. What are your plans to handle that demand?

Okay, we’ll welcome obviously the much higher gold price. I mean we’re going to be focusing on delivering a 140,000 ounces to 150,000 ounces within our guidance per annum. Obviously if this happens and the gold price goes a lot higher, I mean I mentioned the sensitivities of our profit numbers to gold price increases. So obviously that will have a very positive impact on the cash generation of our assets and it could potentially mean much bigger dividends for our shareholders down the line.

Okay. Thank you. If there is no further questions, I think we’ll wrap it up. Thanks very much.

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