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DRDGold declares dividend; reports rise in profit

‘We don’t have control over the revenue, but we do have a measure of control over cost’: CEO Niël Pretorius.

NOMPU SIZIBA: DRDGold released full-year financial results today, September 1, 2020. In the 12 months ended June 2020, the company has reported robust numbers. Revenue came in at R4.2 billion, up 52% on the year prior. Operating profit hit just under R1.6 billion, up 320% on the year prior, while headline earnings per share rose a whopping 656% to 82.4 SA cents from a mere 10.9 cents in the year before. Shareholders are set to get a final dividend of 35 SA cents a share, taking the total-year dividend to 75 SA cents.

To discuss the results further, I’m joined on the line by Niël Pretorius, the CEO at DRDGold. Thanks very much Niël, for joining us. The much higher gold price, relative to last year, and the favourable weaker rand exchange rate appear to have been a boon for your numbers.

NIËL PRETORIUS: Undoubtedly. We have never seen a gold price at these levels. It’s gone through R1 million/kg, which is considerably higher than the average that we got for the 12 months, which was just over R700 000, R730 000-odd/kg. So that, coupled with reasonably steady production – encouraging production, in fact, considering the circumstances – really put us in a very favourable position in terms of revenues and ultimately also margin and free cashflows.

NOMPU SIZIBA: In the mining industry the key measure of cost is the all-in sustaining cost. I see that stood at R541 475/kg. How did that look relative to the year prior, and where did you continue to try and achieve efficiencies?

NIËL PRETORIUS: Well, ours is a numbers game. It’s an economies-of-scale game. We have ultra-volume on the one hand and micro-extraction on the other. So it’s important that we really track the revenues, the margin, the cost, in respect of each tonne that we process. We don’t have control over the revenue, but we do have a measure of control over cost, and also the extraction efficiency. And we’ve built, I think, a fairly sophisticated system round that to make the business more predictable. And there’s good discipline in the business itself, because it is literally being tracked on a per-tonne basis, notwithstanding the fact that we are in the mega-tonne environment.

So that’s put us in good stead. We were then confronted with the challenges during the latter half of the year. Because we are essentially automated, maintaining a nice social distance wasn’t that much of an issue. It was harder for us to get our employees to the workplace safely than it was for us to implement protocols on social distancing, and create an environment that was reasonably safe at the workplace itself.

All of those measures enabled us to then resume production, albeit at a reduced rate – but, I suppose, more favourably than one would have had the experience at the ultra-deep level environment, which is far more labour-intensive.

So I think it’s a story of many, many years of development of a system that enables us to track minute detail, and detect costs on a per-tonne basis and, on an ongoing basis, also to just work on efficiencies. This seems to set a very high standard for itself in that regard.

NOMPU SIZIBA: Niël, just tell us about the relationship that you have with Sibanye, the project that you’re working on with them, and the kind of yields you’ve got from that so far.

NIËL PRETORIUS: Certainly. That was a big catalyst for, I think, with the business currently, and in particular the movements in our market cap. At the beginning of the year I think it was somewhere around R50 billion market cap, and we finished at about, I think, R23 billion.  We went through $1 billion, in fact, which was a highlight for me personally – or sort of a career highlight, I thought.

And then we know that the new project, and being able to successfully develop that project, played a major role in that regard. And I think Sibanye, the resources at their disposal and the fact that they invested just over R1 billion into the capital of the company – that sent a very, very strong message to the market. I think the market now looks at us as a business with a bigger older parent in the wings, and a much larger balance sheet. So it’s probably introduced us to a new set of investors as well.

So, on the whole, I think the benefits from having established this relationship and having become a subsidiary in Sibanye – those benefits have been huge, and hopefully we can continue to leverage that relationship in terms of some of the other non-core assets that they have, and that we might be able to get involved in bolting that on.

NOMPU SIZIBA: The pandemic has come with a lot of major socioeconomic upheaval. What sort of support were you able to give to your surrounding communities where you operate?

NIËL PRETORIUS: A lot of the communities in our immediate vicinity are impoverished communities, and many of them are on a per-day economic cycle, where they have to earn money on a daily basis in order to eat that day. So with the lockdown obviously the opportunity to go out and earn a day’s wages  – that is affected. So in order for us not to have an onset of immediate hunger, and everything that goes along with that, with our social-investment partners from …, we launched a programme called the MSE programme, which stands for Merafong, Soweto and Ekurhuleni project. It involved over 5 000 families who received food parcels over a cycle of three different periods. And these were parcels that could sustain a family of four for a period of about two weeks.

I think what was more, we’ve run a programme in all of those communities over the last five, maybe six years, called the Broad-Based Livelihood Programme. This is an urban farming initiative. And there, too, a lot of families, because they’ve been involved in this for quite some time, were able to basically grow their own food during this period. I think a lot of the families around them, other community members around them, could also benefit off that. A lot of those, in fact, have also become small businesses – 150 now I think  now are commercial farmers. So those were the main impacts. They were …… here and there.

We made a contribution to one of the hospitals for emergency beds and so forth. But, in terms of the immediate suffering in the communities around us, those were the key issues. And of course also the Solidarity Fund – but that’s also just a financial contribution, it’s not …… communities.

NOMPU SIZIBA: Even though the demand for gold is seen ebbing and flowing, it’s broadly on a roll, given the uncertain times that we live in. But, given that you are a one-commodity play, what do you do to mitigate the impact of those days when gold is not viewed as sexy?

NIËL PRETORIUS: We really invest in the business and further, let’s call it, invest in resilience. So we don’t hedge, we don’t protect revenue, because we do think that there is sort of a natural equilibrium, and that decouples and recouples at different levels, and so forth. But invariably, longer term, forward-selling contracts or hedging contracts have a way of catching up with you. So we do take full exposure, and we’d rather invest in flexibility. Optionality is another term to describe it. We invest in business resilience, essentially.

NOMPU SIZIBA: Linked to that question and your answer, what’s the outlook?

NIËL PRETORIUS: We hope that the gold price stays more or less where it is. The one thing that I can say with absolute certainty is that, whatever I believe the gold price is going to be, I’m wrong, because we still don’t get it a hundred percent right.

I think that the fundamentals for gold are good, but I also believe that the current high levels are to a large extent based on global sentiment. And, once the world believes that Covid-19 is under control, I think investors might start selling off some of their gold stocks, and the gold price might come under pressure again. At some point or another, there might be a bit of a supply squeeze. I don’t think enough capital is going into new ore bodies. And I think there are a lot of open positions in terms of gold loans. But that’s an entirely different story, entirely different thesis.

So at the moment I think the world is just scared, it’s uncertain, and a lot of investors are investing in gold to protect purchase parity and protect their capital.

NOMPU SIZIBA: That was Niël Pretorius, the CEO at DRDGold.

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