ALEC HOGG: It’s Tuesday February 14 2012 and in this Boardroom Talk special podcast, Neil Pretorius, chief executive of DRDGold, is with us in studio after results for the quarter to end December were released. Well, you’re shooting the lights out, Neil, but I guess DRDGold remains highly geared to the gold price. I thought you guys had built a gold processing factory but an 11% improvement in the rand gold price, 2% drop in costs and hey presto, your headline earnings are up by two thirds.
NEIL PRETORIUS: Ja, it’s all gold price, Alec, and it looks as though a degree of gearing still remains, so there’s a little bit of excitement left in DRDGold, it’s not all, I suppose, predictable cash flows.
ALEC HOGG: R250 000 [0:40] cash from operations, these are big numbers now that you guys are generating.
NEIL PRETORIUS: Ja, ja, a few months ago that was a quarter of our market cap, R250m, we’re very pleased with that. I suppose it’s having positioned ourselves to take advantage of a high gold price environment. The cost of these circuits are pretty steady, production is pretty steady, we don’t have a lot in interruptions because of labour and so forth. So it’s something that one could model, it’s something that one could plot.
ALEC HOGG: Ergo is East Rand Gold and Uranium Company, used to be part of Anglo American, now part of your operation.
NEIL PRETORIUS: Correct.
ALEC HOGG: Just take us through, what is exactly or how that process works?
NEIL PRETORIUS: Well, basically what we do is recover old mine tailings by way of high pressure jets and these get pumped across…
ALEC HOGG: So what are old mine tailings?
NEIL PRETORIUS: These are old mine dumps, basically it’s rubbish, it’s old mine rubbish.
ALEC HOGG: So they mined the gold and then there was other stuff that came out at the end and they had to dump it somewhere…
NEIL PRETORIUS: Yes.
ALEC HOGG: …that’s what you’re now re-mining, how old are they?
NEIL PRETORIUS: The Top Star dump, for example, that we just finished mining or finished reclaiming, I think that was established almost at the beginning of the previous century. ERPM is 120 years old and the bulk of the materials going into the Ergo plant is from ERPM, so it’s several decades old, in some instance more than a century old.
ALEC HOGG: So the gold they were mining those days was very rich that they left quite a bit behind, how much?
NEIL PRETORIUS: Yes, well in some instances, at Top Star, for example, there was up to three quarters of a gram left…
ALEC HOGG: Per ton?
NEIL PRETORIUS: Per ton, yes.
ALEC HOGG: Now, normal people will say you’ve got to be crazy to take a ton of material and only get three quarters of a gram of gold out of it.
NEIL PRETORIUS: Yes.
ALEC HOGG: Sounds like a lot of work for a little bit of gold.
NEIL PRETORIUS: No, it’s an ultra volume environment, it’s ultra concentration, I think that’s the nature of the game. It’s very much a factory process, it’s no longer really mining, it’s all about maintenance or rather mechanised processing. You’ve got very little in the way of maintenance capital because all your capital is spent upfront when you build your plant and so forth. With the gold price where it currently is at and with the technology improvement that we hope to be implementing over the next 18 months or so, our cutoff drops down to 0.22, so that’s a quarter of a gram per ton in order to breakeven at where the gold price currently is at.
ALEC HOGG: How many gold dumps are around that have higher than a quarter of a gram per ton left in them?
NEIL PRETORIUS: Most of them, most of them are, the dumps that we just came off or the tailings dams that we just finished creating, so to speak, through Crown, we had four plants in and around Johannesburg of which two are being decommissioned. Now, those two plants moved 250m tons of material over the last 30 years. Those dumps that we created all contain more than a quarter of a gram of gold [Unclear 3:32]
ALEC HOGG: The dumps you created?
NEIL PRETORIUS: The dumps that we created through our previous process of retreating dumps.
ALEC HOGG: So you can retreat you own dumps then?
NEIL PRETORIUS: Correct. Eventually you could retreat those old dumps again.
ALEC HOGG: And in the rest of the country, the rest of the Witwatersrand?
NEIL PRETORIUS: It’s very limited because in order to be successful as a recycling entity you need a very large plant, you need to be able to connect all your various tailings dams, your reclamation sites with that plant and you also need a very large deposition site. Now we did a bit of a back of an envelope calculation a while back and if we had to recreate the current infrastructure that we have at our disposal, the plant, the tailings dam, etc, we were going to need probably two to three times our current market cap. So it’s only because we’ve been in the business for a long time and we bought this plant from Anglo and they build a phenomenal plant and then we had to do very little to refurbish it back to where we needed to take it to process our tailings. They’re done processing their tailings that belong to them. It’s only because we had that advantage that we could really now treat these tailings at a profit.
ALEC HOGG: So you would definitely not rebuild the infrastructure that you have today, it wouldn’t be profitable?
NEIL PRETORIUS: We wouldn’t be able to do that. If you have an investor with deep pockets and who’s patient, who’s willing to wait the three or four years to build that I think you could still create a model, you could still do that. But a company with our capacity we could never do that again, we can’t transplant what we’ve got now and put it somewhere else. We need to access and optimise the exploitation of the roughly 11m ounces of gold still left in the tailings that we have under our control.
ALEC HOGG: How long is it going to take you to process that?
NEIL PRETORIUS: Alec, many, many years. We could realistically access about 600m tons and we could do that at a rate of 30m tons per year, producing between
140 000 and 150 000 ounces per year.
ALEC HOGG: So you’re not looking for more mine dumps, you’ve got 20 years of production ahead of you and I guess if the gold price gets to a level you could always ship in from gold dumps in other parts of the country?
NEIL PRETORIUS: You could concentrate somewhere else and maybe treat it here if the gold price really goes up by several times. What we’re looking at doing now is we’ve got the engineering works to move large quantities of material and we could take our volume flow up by about another 600 000 tons a month. So we could move from 2m tons to about 2.6m tons per month. But beyond that point we have capacity constraints volume capacity constraints and then to improve you really have to improve your technology, your extraction efficiency. Now we’re launching a project now that was approved by the board now, another 250m project, which hopefully we’ll be able to cover out of operational cash flows and that will take gold recovery up by between 16% and 20%. That’s simply by just separating out a certain part of the run of mine about 5% of that and then putting that through a fine grind circuit and that would then liberate some of the particles of gold that in the past did not respond to our rometallurgical circuit.
ALEC HOGG: Liberate, get back, in other words, fine tuning though and you’re fine tuning the corporate side of the business as well. You used to have Blyvooruitzicht or you still own it at the moment and a deep mine at ERPM, both underground mines. You seem to have done all the dirty work at Blyvooruitzicht, why sell what Bernard Swanepoel told us last night is a profitable small operation when you’ve now done the hard stuff?
NEIL PRETORIUS: Alec, I think Blyvoor became a very uncomfortable fit for the DRD shareholder or who was becoming the majority of the DRDGold shareholder because on the one hand we represent the lowest risk in mining in South Africa and then on the other hand we represented some of the highest risk in gold mining in South Africa and that’s a difficult sell. Increasingly we were, I think, being penalised for the risk overhang associated with Blyvoor. We sold the mine for shares and we’re very happy prospective Village shareholders because we do believe that the mine has now found the proper home. You’ll recall that when I was talking about who we want to sell with initially that we kept on saying a safe pair of hands, it needs to find the right home…
ALEC HOGG: But you were looking everywhere if I recall, China, it wasn’t really a safe pair of hands, you just wanted to get rid. Even Aurora, President Zuma’s ill-fated nephew.
NEIL PRETORIUS: [Laughing] Yes. No, look, I think you also…sometimes this industry has a way of teaching you lessons the hard way. No, look, I think…
ALEC HOGG: But you’ve got the safe pair of hands in Bernard Swanepoel and Village now.
NEIL PRETORIUS: We’ve got the safe pair of hands. We had five offers for the mine and some of those offers were better value wise than what was initially offered by Bernard but I do think that in South Africa Village at this stage is probably the best home for the kind of mine that Blyvoor is. Already we’ve seen…our shareholders, I think, have started to reward us for the transaction and so is Village, so it makes sense to move the mine into a place where it’s aligned with the rest of the operations.
ALEC HOGG: You’ve already made a R46m profit on that purchase. You bought it at 175, Village is at 229 at the moment, are you going to hold on to all of those shares?
NEIL PRETORIUS: We’ll hold onto it for a while, obviously we’re not in the business of having strategic investments in other gold mining companies but we want to see the upside of the mine and that upside is through the share price of Village. I don’t think it’s anywhere near where it’s going to sell.
ALEC HOGG: So where would you be sellers of the Village shares.
NEIL PRETORIUS: Alec, we’ll take advice on it but Village are going to be making quite a bit of money because I think most of their mines are in the money at this stage, I don’t think the market’s fully factored that into the share price. I do think at some point or another somebody is going to sit up straight and say, hang on a second but these guys are sitting on a huge platinum resource and we’re not seeing any of that in their share price either. So I think it’s got a long way to go before we will…
ALEC HOGG: So 229, good bargain, you would certainly not be selling here and maybe advising your mother to buy?
NEIL PRETORIUS: [Laughing] Yes, ja, maybe I would.
ALEC HOGG: Maybe, he says but just getting back to Blyvoor, was that part of the deal that you had to do the tough stuff, close those two shafts, retrench 1800 people?
NEIL PRETORIUS: Not at all, no, not at all. Remember Blyvoor very recently was in business rescue protection, I think that was last year August, when there was a real risk that it wasn’t going to be able to cover its overhead and the rescue practitioner went into a detailed study of what needs to happen at the mine in order for it to be sustainable in the long term. Now, some of these processes were interrupted because what was necessary for long-term sustainability wasn’t really necessary for rescue but we did closely track, I think, some of the targets that had been set at the time. These two shafts in particular just got nowhere near those targets in so far as great recovery was concerned and remember, there are several conditions that still have to be met in order for the Village/DRD deal, the Blyvoor deal, to go through and whilst we’re confident that we’ll meet those conditions, if we don’t meet them then the mine stays with DRD and then to then have waited several months before you start implementing these procedures might just be too late.
ALEC HOGG: So what happens at ERPM now? That’s the last of the underground operations you have.
NEIL PRETORIUS: Look, the old ERPM has been closed completely, there are no longer any operations but we applied for and were granted mineral rights right next door to ERPM, under the old Sally’s. Now this resource sits right in the middle between the old ERPM and Goliath Gold. Goliath Gold, I think Gold One was successful in listing their Goliath Gold asset. We’ve benchmarked it against what the market says it’s worth and we think that there’s value there, not for us to develop and so forth but certainly take up the value curve and maybe position, ultimately position independently so that the market can attach a value to it.
ALEC HOGG: So that’s why you’re still drilling a few holes to find out exactly what is underneath there.
NEIL PRETORIUS: Exactly, exactly, yes.
ALEC HOGG: When you go into the future, you’ve now told us that there’s a 20 year life that is still in the factory, what kind of gold production a year are you likely to be producing and I ask this because clearly these figures of 63 000 in the quarter would have included Blyvoor.
NEIL PRETORIUS: That is correct. Alec, our target is between 140 000 and
150 000 ounces. That’s over life of mine, the current life of mine, we limit our life of mine to ten years for purposes of capital reinvestment and so forth. It takes into account a slight increase in gold production in the near term, once our fine grind technology is up and running and a slight trailing off towards the end.
ALEC HOGG: So how much are you losing by getting rid of Blyvoor, of the 63 500 ounces?
NEIL PRETORIUS: About 30 000.
ALEC HOGG: So half…
NEIL PRETORIUS: About half of our production, yes.
ALEC HOGG: So half your production is going?
NEIL PRETORIUS: Half of our production and in the last two years less than 10% of profit.
ALEC HOGG: But that would also, clearly, give you a smaller gearing then to the gold price in future?
NEIL PRETORIUS: Yes, absolutely, I think there are a number of things we need to do. We were never going to grow ourselves out of distress. If you think back less than a year, maybe less than 18 months, it was a company that was still trying to find its balance, find its feet, recreate itself almost. I think the platform is there, we’ve got a solid cash flow platform, we’re trying to fix the register to get the right shareholders onto the register. I think off that platform we could then start looking to the left and to the right and see what other opportunities are there for our business.
ALEC HOGG: So it’s a factory that’s producing between 30 000 and 40 000 ounces a quarter at a cost of?
NEIL PRETORIUS: About US$1000.
ALEC HOGG: $1000 an ounce, so anything over $1000, pure profit. All you have to do is take this back, work it into your discounted cash flow models and you’ll know whether or not the shares are cheap, are they?
NEIL PRETORIUS: I think they’re very cheap, Alec. [Laughing]
ALEC HOGG: How quickly will you get your money back then from the new way that you’re looking forward? Take the…leave Village one side, your Village investment one side and leave the possibility with ERPM being sold on or after you’ve done your development there, how quickly would an investment today give you your money back? What kind of PE?
NEIL PRETORIUS: On this fine grind our payback is three years. Our payback I think conservatively measured or forecast is three years.
ALEC HOGG: So if you buy the shares today, DRD, all other things being equal, at these gold prices will earn back your money for you in three years?
NEIL PRETORIUS: Well, our capital reinvestment at a healthy discount of 14% repays the capital investment now over three years. Just the cash flows.
ALEC HOGG: But if you bought the shares today?
NEIL PRETORIUS: Ooh no, if you bought shares on the New York Stock Exchange or Nasdaq at the time, one year ago, exactly to the day, then you would have earned 60% to date.
ALEC HOGG: Neil Pretorius, the chief executive of DRDGold.