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DRDGold profit leaps on increase in gold price

The company takes ‘full exposure to the gold price,’ so knows both the agony and the ecstasy of a volatile price: CEO Niël Pretorius.

NOMPU SIZIBA: Gold miner DRDGold released its half-year earnings for the six months ended December, 2020. The company reported revenue coming in at R2.98 billion. That’s up 41% on the year prior. The company saw its operating profit rise by 100% to R1.4 billion, while headline earnings per share came in at 111 cents. That’s up a whopping 129% on the year before. Shareholders are getting an interim dividend of 40 cents a share, up 60% on the year before.

To  discuss the results further I’m joined on the line by Niël Pretorius, the CEO at DRDGold. Thanks very much for joining us, Niël. It must feel really good to be presiding over these results this time around, but of course the gold price – especially the rand/gold price, which was up 42% on the year prior – aided in boosting your fortune.

NIËL PRETORIUS: Oh yes, very much so. That is deliberate. We take full exposure to the gold price, so we know what the depths of agony feel like, and now we also know what the ecstasy of a high gold price feels like. It doesn’t happen very often but, once it does, e will take it because we take full exposure to the gold price.

NOMPU SIZIBA: I hear you. So what was the story on the production side? I do see that there was a decline there of about 2% in the period.

NIËL PRETORIUS: Okay, volume throughput was still satisfactory; we are happy with the volumes that we managed to get. We are mining a very low-grade resource, though. And, if you multiply everything by north of two million tonnes per month – our production cycle – a difference in the third decimal could have a 10/15/20 kg difference at the end of that period. So it’s by and large the head grade that went into the plant. I’m happy that our metallurgical efficiency and plant setup, but those were under control. Plus we are under …..[1:56]. It’s really a function of the quality of the ore body, and it comes and it goes. There are some of the higher grade types that have been mined out, but on the whole it is something that does come and go.

NOMPU SIZIBA: Your all-in sustaining costs were up 17% on the year prior. Why were your costs up so much relative to the previous year?

NIËL PRETORIUS: Well, there’s this close to R200 million in additional capex that’s been spent. Obviously we do want to position ourselves favourably for the next cycle, both in terms of resilience but also to take advantage of the next super-cycle, which we believe is maybe not too far into the future – and that takes money. So a lot of money is going into infrastructure. A lot of money is going into planning, into de-risking. We are wanting to establish power-storage facilities, as well as ultimately also power-generation facilities. So it’s to set ourselves up. We’ve accelerated capex. I think that’s probably the short answer.

NOMPU SIZIBA: Right. We know that the mining sector was not as badly affected by the Covid-19 regulations as other sectors were, but what has DRD’s experience been in terms of handling the new way of doing life and work and keeping your staff safe?

NIËL PRETORIUS: We put protocols in place, but ultimately it is up to our staff to follow those protocols. I must say I’m very proud of how our entire labour force and our staff responded to this. They’ve really taken it on board. They maintain social distancing, they wear masks, they can move stone very responsibly with hand-washing and so on. So the response from the people of DRDGold has been phenomenal.

I think we saw that in the numbers. We’ve had very little disruption in terms of operations because of infections. We have had infections that occurred we believe outside the workplace; but inside the workplace we seem to have managed to put protocols in place that, if followed, make it a safe place to work at.

NOMPU SIZIBA:  Yes. You currently sit with a fair bit of cash. Apart from paying out to shareholders, are there any plans on how you’re going to be utilising the some R1.4 billion in cash that you are sitting on?

NIËL PRETORIUS: We managed to  push the cash balance just north of R2 billion. There is a dividend that is going out, a 40 cents dividend per share. About half of the cash that we have, about R1 billion, is from a subscription for shares by our parent, Sibanye Stillwater. Obviously that money is going into project development. And then also a portion of, let’s call it, the windfall profits from our Far West Gold operations, has been set aside for that.

So there’s a lot of focus on developing Phase two, making sure that that we are positioning ourselves to be able to do that. But the real free cash is still getting distributed to shareholders.

NOMPU SIZIBA: I want to go back to something you said earlier about the super-cycle that you anticipate. From a fundamental point of view, do you feel that gold will always have a place in people’s investment portfolios and their safes, even if not necessarily aggressively so?

NIËL PRETORIUS: Yes, I do. I think that ultimately gold is something that people invest in reluctantly. You’ve got to admit that [there’s the thought that] “maybe I’m a little afraid of what’s lying ahead, and therefore I’m going to put some money in gold.

There’s a lot of money out there that’s not supported by anything. The printing presses have been working nonstop at the central bank, so a lot of liquidity is being created that is really artificial. And of course, everybody’s chasing after the high-yield stocks – techs that are high, cryptos are at a high, and so on. I don’t quite know how strong those investments are in terms fundamentals. At some point or another sentiment might change and then, when there’s nothing else, when everything is confusing, it’s nice to know that there’s a shiny yellow metal that we believe has had intrinsic value for several thousands of years, and then people will just go back into that. The circumstances are just based on what happened in the past. I think conditions are very, very favourable for that to happen. It could be in a year from now, it could be in five years from now – we don’t know, because a lot of what’s happening is sentiment-driven. But I do believe that gold as a store of wealth has not lost its shine. On the contrary.

NOMPU SIZIBA: Yes. Because you are a one-commodity play, you’ve talked about how you’ve been there when things have been tough, and now it’s nice to be presiding when things are looking better. But what is the strategy if suddenly the dynamics change? I remember that for the longest time gold just wouldn’t budge beyond $1 200/oz, and you guys had to really work on pushing down your costs. That’s all you could really do. But now suddenly it’s $1900, even $2000/oz. But, of course, it could go down. So what’s the strategy when that happens, should it happen?

NIËL PRETORIUS: Well, investment into more resilience in the business itself, more in the business. We’re trying to de-risk the business in terms of its volume capacity, but also in terms of power generation and power storage; it’s taking out some of the cost risks in that regard.

And then of course we’re increasingly interpreting our strategy within the context of where Sibanye Stillwater is going, and how they’ve articulated their strategy because ultimately we do want to align with them, as a member of that group. I think there is lots of opportunity in that regard, and we are getting a friendly audience from them in these conversations. So we really don’t want to miss this opportunity.

We want to develop those synergies, as well, to the extent that we can add into the broader strategy. And there are some compelling opportunities where we are very well aligned with their investment theme, with where they want to go, and we think that there’s a role for us to play within the context of this much larger entity

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

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Stock price heavily shorted. Hopefully a ratings improvement will assist.

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