DRDGold Limited: The Selloff Seems Overdone

May 11, 2022 11:25 AM ETDRDGOLD Limited (DRD)SBSW, VSGX, RING, IEMG, EEMS, AVEM, VT, DFAX, DFAE, TLTE, JGLD, VRAI, DGS12 Comments

Summary

  • Gold prices are back to their levels from the middle of January, but the market valuation of DRDGold has decreased 17% compared to then.
  • Gold has historically been a good inflation hedge, and I think that it’s likely to resume its upward trend.
  • In my view, the Q1 2022 results of DRDGold were good, and this seems like a good time to pick up some shares cheap.

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Introduction

It's been over 7 months since I've covered DRDGOLD Limited (NYSE:DRD) on SA, and I think it's a good time to revisit the company, considering its market valuation has dropped by over 30% since the middle of April. The share price seems to be dropping because gold prices have declined by over $100 per ounce over the past month, but I think that the selloff at DRDGold looks overdone. This could be a good time to open a position or add more shares. Let's review.

Overview of the recent developments

In case you haven't read any of my previous articles on DRDGold, the business specializes in the recovery of gold through the retreatment of surface tailings around the vast amount of abandoned mines in the Witwatersrand Basin in South Africa. It utilizes water hoses to slurrify slime or sand, which is then pumped through pipelines as far as 60 km away. The operating footprint of the company is over 1,000 square kilometers and the yield is pretty low - just around 0.2 g/t. Yet, the business is economically feasible as there is no blasting, crushing, grinding, and etc. that are associated with traditional mines.

DRDGold currently has reserves of 5.35 million ounces and resources of 10.12 million ounces gold. The mine life is over 20 years, which is impressive for a gold producer. Usually, the mine life of many new gold mines today is about 8-10 years.

DRDGold currently has two operations, namely Ergo and Far West Gold Recoveries (FWGR). The latter was bought from platinum group metals (PGM) major Sibanye-Stillwater (SBSW) and this company currently owns a 50.1% stake in DRDGold. I think it's likely that Sibanye-Stillwater will buy out the remaining shares in the company at some point over the next few years.

In Q1 2022, DRDGold produced a total of 44,722 ounces of gold, which is about 3% less than in Q4 2021. The yield increased by 2% to 0.209 g/t but tonnage throughput declined by 5%. All-in sustaining costs (AISC) rose slightly, and this can be attributed to several factors - temporary equipment failure, load shedding, power grid failures, and downtime due to higher than seasonal rainstorms. Higher rainfall increases the consumption of cyanide due to lower densities in slurry.

DRDGold Q1 2022 production

DRDGold

The company's fiscal year ends on June 30 and it seems that production is likely to be about 180,000 ounces of gold. This is at the high end of the FY22 guidance which is between 160 000 and 180 000 ounces. As you can see from the table below, it's a predictable business with a yield of about 0.20 g/t and a quarterly production of around 45,000 ounces of gold. Yields have been increasing slightly over the past few quarters, while AISC have been slowly rising as global supply chain issues and inflation are pressuring the gold sector too as input costs increase.

DRDGold results

Sibanye-Stillwater

Looking at the balance sheet, DRDGold doesn't have any debts, and its cash position increased to 2.3 billion South African rand ($142.7 million) as of March 2022. The company paid an interim dividend of 167.8 million rand ($10.4 million) for the six months ended December 2021, and I think it's likely that there will be another dividend of a similar amount in August unless gold prices crash in the next few months.

Looking at the projects DRDGold has in its pipeline, there is a plan to develop solar power generation facilities at Ergo. It sounds like a good idea, as global energy prices have been increasing lately and South Africa is notorious for load shedding. Unfortunately, there is no information about the timeline or costs of this project. There have been talks about boosting production ever since DRDGold bought the West Rand tailings retreatment project of Sibanye-Stillwater. In 2018, DRDGold said that it was planning to build a high-volume central processing plant with a capacity of between 1.2-million and 2.4-million tonnes a month. However, there hasn't been any major development on this front in 2022 and I find this disappointing.

Overall, I think that DRDGold's Q1 2022 financial results were ok and that the second quarter of the year should be slightly better in terms of output and perhaps costs. The company has been on a 15-year uninterrupted run of dividend distribution and the TTM dividend yield stands at 5.93% as of the time of writing. I think that the share price should be around $10 at today's gold price even without the solar power and production expansion projects. In my view, the market valuation of DRDGold has decreased over the past month due to a weak gold price, which has returned to its levels from the middle of January 2022. Yet, DRDGold's share price is now more than 17% below its level from the same period and this is why the selloff here looks overdone.

DRDGold share price

Seeking Alpha

It's possible that DRDGold investors are nervous that gold prices could continue to decrease due to interest rate hikes across the world. In my view, gold is actually likely to do well over the next years as it has proven itself to be a good inflation hedge. According to a 2021 study done by researchers from Man Group (OTC:MNGPF) and Duke University titled "The Best Strategies for Inflationary Times," gold had an average annualized return of 13% in the 8 inflationary regimes in the USA since the start of World War II, during which annual inflation averaged above 5%.

The Best Strategies for Inflationary Times

The Best Strategies for Inflationary Times

In my view, the major risk for the bull case here is that the inflationary regime we're currently experiencing is similar to Reagan's Boom, when gold prices declined by 18%. We're living in challenging times, and it's hard to forecast how different asset classes will perform this time around.

Investor takeaway

What I like about DRDGold is that it has a long mine life, a strong balance sheet, and a consistent dividend policy. I think that the company is among the best equipped gold producers to weather a storm in the gold market. In my view, high inflation is likely to boost interest in gold investment and thus gold prices. If this is the case, then the sharp decline in DRDGold's market valuation creates a good opportunity to pick up shares cheap.

Author's Note: Thank you for reading my analysis. Please note that I will be launching a marketplace service named Bears and Resources soon. I plan to share my live portfolio and my shortlist and discuss exclusive investment ideas. Early subscribers will receive a legacy discount. Stay tuned for more details.

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I have been investing in stocks for 13 years now, most of the time in my native Bulgaria. I have a bachelor's degree in Finance and a Master's degree in International Business and I like reading Pratchett and Michael Lewis. Regarding the opportunities that I cover, please take into account that I'm an admirer of legendary fund manager Peter Lynch so I tend to follow a lot of his investment philosophy.

- Disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.

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