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Marginal gold miner enjoys stand-out year

DRDGold’s full-year results reflect the benefit of a higher gold price, production and grades – with indications that the good times have just begun.
Far out … the acquisition of Far West Gold Recoveries, which reworks mine dumps on the far West Rand, contributed to DRDGold's increase in both tonnage and yield. Image: Moneyweb

DRDGold showcased the true nature of so-called marginal gold mines this week, when it reported a ten-fold increase in profits in the year to the end of June. Headline earnings increased to R72 million, compared with R7 million the previous year. Headline earnings per share improved from 1.7 cents to 10.9 cents.

This could serve as a textbook example of a marginal gold mine working hard to survive on low-grade ore year after year, then delivering bursts of tremendous profits in years when conditions improve. The fundamentals underlying this drastic increase in earnings show that things are currently going splendidly.

Read: Gold gets driven toward $1 600 as oldest haven shows its mettle

Everything a marginal mine (and its shareholders) could wish for came together in second half of the financial year. The gold price increased sharply, the rand weakened, and production volume increased at slightly higher grades.

Read: Investors hoard most gold in ETFs in six years

DRDGold’s operations are simple and straightforward, but challenging and difficult at the same time.

The reworking of old mine sand and sludge left in mine dumps and tailings dams from decades of mining may seem easy from a distance. You only need a small workforce to spray the silt with a water cannon and pump the slurry to a plant to recover the gold the old miners left behind.

The difficult part is to get the refining and chemical processes exactly right to recover the less than 0.2 grams of gold left behind in every ton of sand.

On top of that, the whole process needs precise engineering from beginning to end, to ensure uninterrupted high production volumes to make the process financially viable.

DRDGold CEO Niël Pretorius explained the challenge in recovering 0.19 grams of gold from a ton of sand: “Imagine searching the whole of Africa’s population for 190 individuals.”

He neglected to add that DRDGold needs to find the 190 missing persons within a population of one billion, several times every hour, every day to be successful. Last year’s figures proved that it achieved this daunting task.

All profit drivers moved in the right direction, especially in the second half of the financial year. Overall sand reclaiming increased to more than 13.3 million tons in the second six months, compared with 12 million in the first half, while the yield rose from 0.19 grams per ton to a fraction more than 0.2 grams.

Close to five tons of gold from leftover material in a year

Higher tonnage at better grades increased gold production to 2 697 kg in the second six months and annual gold production to just shy of five tons for the year – an increase of 6% year on year.

The increase in both the tonnage of material treated and the yield per ton was partly due to the inclusion of the first production from DRDGold’s recent acquisition of Far West Gold Recoveries (FWGR), which reworks mine dumps on the far West Rand.

Previously, operations were focused on mining material to the south- and east of Johannesburg, with the Ergo plant being the biggest for years. FWGR was acquired from Sibanye-Stillwater with effect from the end of June 2018, but commercial production only started a few months ago, following significant upgrading of the treatment plant and other infrastructure.

Just the beginning

Pretorius noted that production figures from the FWGR were only included in the results from April this year, thus for only a few months. However, he said it contributed 440 kg of gold to the annual production.

Geoffrey Campbell, chair of DRDGold, said in the previous annual report that the acquisition of FWGR is of significant importance, because the gold content of these mine dumps is higher than those that were put through at the Ergo plant.

The first few months of production of the western mine dumps returned an average recovered grade of 0.23 grams per ton, compared with the recovery of 0.19 grams per ton at the eastern facilities.

At the time of the FWGR acquisition, management said the transaction would add more than 244 million tons of material to the company’s reserves, at an average in situ grade of 0.34 grams per ton. These grades indicate that recoveries can still improve on the reported recovered grades of 0.2 gram per ton once the refurbished plant is properly bedded down.

The history of the mine dumps gives a clue as to why.

The mining material is that left over from the rich ore mined at the old Kloof Gold Mine and the East and West Driefontein mines. At the time, these operations mined the richest ore seams in SA.

Pride and pleasure

The few months of production at FWGR, together with the solid results from Ergo, enabled DRDGold to pay back all the loans it raised earlier in the year to refurbish the FWGR plants.

The cash flow statement shows borrowings raised of R192 million. The very next line shows borrowings repaid: R192 million.

Financial director Riaan Davel had great pleasure in pointing this out to shareholders and analysts during the results presentation earlier this week.

He also highlighted DRDGold’s strong cash position and the fact that the FWGR acquisition added R1.2 billion to assets.

Chances of continued improvement and profit growth seem promising, with management upbeat about the immediate future. Pretorius noted that the figures for the year to June do not reflect the recent sharp increase in the gold price.

The average for the year was given as $1 267 per ounce, slightly lower than the $1 300 achieved in the 2018 financial year. Since then, the gold price has raced to above $1 500 per ounce, while the rand has declined sharply to around R15.20 to the dollar.

The higher gold price and lower rand will have a huge effect on DRDGold’s revenue as well as profit, as long as it can contain cost increases.

The gold price averaged just more than R577 000 per kilogram during the year under review, with Pretorius saying it has increased to R740 000 per kilogram recently.

Gold price predictions

He says it is difficult to predict the gold price, but put forward a very interesting argument to explain why he believes the gold price might remain strong.

“We must consider whether the gold price increased because of market sentiment or substance,” says Pretorius. He argues that the recent increase in the gold price might only be due to positive sentiment up to this point, with the effect of changing fundamentals still to come.

There is one fundamental reason why DRDGold can continue producing good results, despite the uncertainty of the gold price. Management said gold production will increase to between 175 000 and 190 000 ounces in the new financial year when FWGR is running for the full period and the capital projects at Ergo start to contribute.

This is up to 20% higher than in the past year. In addition, nobody really expects the rand to improve much over the next few months.

Annus mirabilis for DRDGold




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