WARREN THOMPSON: Good day, I’m the editor of Mineweb and joining me on the podcast today is Niel Pretorius, the chief executive officer of DRDGold. Good to have you with us, Niel.
NIEL PRETORIUS: Thank you.
WARREN THOMPSON: The interim results that you reported for the six months ending December 2016 you showed that production had fallen by 7% to 2 100 kilograms of gold and the amount of gold sold fell by 10% to 2 298 kilograms, but operating profit still rose by 4% to R172.6 million on the back of stronger rand/gold prices. So just from your perspective, Niel, the operating profit very positive but you did report a headline loss, just explain to us how we went from the operating profit to the headline loss?
NIEL PRETORIUS: Certainly, we are pulling out of the West Rand footprint in the Roodepoort area, the Crown plant has basically reached the end of its life, so we are moving further east towards the south of Johannesburg, Springs and Brakpan, where the Ergo plant is. So a portion of the charges that were brought against the income statement in the last six months included R18 million for redundancies, for retrenchment payments, there was also an accelerated depreciation for some of the Crown assets that we still carried on balance sheet and because the share price performed well we also had to adjust our long-term valuation for long-term incentive payments. That’s about a R12 million cost that’s been recognised. So two of those were non-cash items and one was a cash outflow associated with redundancies. That would have added about 11c to headline earnings, two non-cash items and the one cash outflow item.
WARREN THOMPSON: Then also from a unit cost perspective you had an increase I think of 10%, if I’m not mistaken. Sorry, the 14% increase in the cash operating cost per kilogram, while the operating margin remains stable, so you mentioned some things that were increasing ahead of our CPI at the moment was wages and then electricity and water, so just explain…
NIEL PRETORIUS: Those two are already factored into costs going forward and typically we manage to offset those either with production and more often than not you’ll see the gold price also keeping track. The gold price doesn’t stay, despite the ups and downs, over the longer term it does tend to increase somewhat.
These additional costs that we incurred over this period are mostly associated with the final stages of rehabilitation/production on that site. There are two sites, one is an older legacy site next to the Crown plant and the other one is a site where production is now coming to an end, where we have mined out most of the resource. This particular site was built in a low-lying wetland area, it actually displaced a stream, so to lift the material out of this particular site cost more than what we’re accustomed to. Typically our cost per ton is roughly between R70 to R80 for most of ours sites. We’ve had instances where it went up to about R150, R160. So these are now coming to an end, both these clean-up sites, we’re moving into three new sites that have been commissioned in the central part of Johannesburg and further east, closer to the Ergo plant, fortunately not lying in similar areas, these are easier to access. So we are likely to see better consistency and tonnage throughput, we’re anticipating an increase in tonnage throughput and obviously in so far as these replacement tons are concerned, a fairly significant reduction in operating cost, around 200 000 tons of material that would be the replacement materials coming into the plant on a monthly basis.
So for us the financial year up until now consisted to a large extent in tying up some of the loose ends associated with pulling out of the West Rand and consolidating operations closer to the plant. It’s the nature of the business, we actually own several smaller mines, each resource, each dump is a mine that has its own characteristics and out of ten dumps that we process maybe one would pose these challenges when it comes to final clean-up. This was a particularly large site that had been built 80 years ago in an area that was environmentally sensitive. So we took the decision that we’re going to see this through, we’re going to clean it up while we still have infrastructure here.
Now we are moving into areas that are far less challenging to mine, easy to maintain volume throughput and also consistency of throughput, which impacts on densities and recovery efficiencies. So, on the whole a year of consolidation, clean up, tying up the loose ends and setting the basis or the platform for us moving forward in the new financial year from July, August and onwards of mining off a far more stable and predictable platform.
WARREN THOMPSON: Now, some of the distances are quite incredible, we were just talking before the interview about where the material comes from and then where it goes to in terms of the tailings facilities that you’ve prepared and you have in place. With the operations moving closer to the Ergo plant what do you work on as a cost per ton to move this material, say, from the West Rand as opposed to the East Rand, is there a tangible difference in that…
NIEL PRETORIUS: There’s not much of a difference in so far as the actual day-today production costs are concerned. Distance is not really your issue but if you have to lift your material that could impose quite an energy cost, whereas here you basically accelerate large quantities of material. You’ll find that your cost savings are mostly incidental, namely it’s a more accessible area, so you don’t have to mechanically lift materials, stockpile it and only then wash it away because it’s all done by way of pipelines and pumps and so forth, it’s the slurry that gets pumped. You’ll have a smaller footprint, so less security and so on. The real saving lies in the fact that it’s easier and cheaper to reclaim this material, as opposed to the fact that it’s closer.
WARREN THOMPSON: One of the things that I think you identified as affecting your production was the throughput in the grade and I was quite interested in the grade because ultimately this is a massive volume business and I wanted to try and understand how much control you think you have over grade and, again, working closer to Ergo, will these plants in the East Rand provide you with a better sense of what’s coming into your plant on a half-yearly basis?
NIEL PRETORIUS: Yes, we’ve got a good sense of our grade, the areas that we are mining are of a slightly lower grade, many of the older sites that are mostly sand sites have been reclaimed fully. So grade is stabilising at a somewhat lower level but you do make it up with your volume throughput. So the infrastructure has been set up in such a way that we can probably mine a little bit more than what we’re mining at the moment. You have to keep the plant consistent though, you have to keep the plant in a stable condition or in balance because sometimes by pushing too much volume through your residence time in the plant is inadequate and you might see lower recoveries.
It’s really a case of consistency and keeping the plant in balance and then finding that sweet spot between your volume throughput and your extraction efficiency. These things are monitored on a second by second basis, we analyse the daily trends on most of the important inputs and then we adjust the throughput based on that, and the chemical mix in the plant as well. The big issues for us really are volume inconsistency, so if there’s bad weather, sometimes you might have half a day or so when you don’t have production, and then just catching up and getting the plant back into its normal rhythm and losing tons from time to time as a consequence of that. In so far as the actual metallurgical processes are concerned, provided that you manage those inputs very carefully the plant process itself has become a fairly predictable process.
WARREN THOMPSON: Just to illustrate for the benefit of the audience, in a normal South African underground gold mine I think we’re getting about six grams/ton based on head grade, what was the grade for the six months that you realised?
NIEL PRETORIUS: My illustration that I usually give people to indicate both the scale and the quality of the material that we introduce, typically a very large plant would receive between 100 000 and 150 000 tons per month of hard rock material. We do just on two million tons a month.
WARREN THOMPSON: Two million tons.
NIEL PRETORIUS: Yes and you very seldom see grades lower than three gram/ton, we introduced just north of 0.3 gram/ton. So our volumes are 20 times higher and our grades are ten times lower, so you really have to manage your input very, very carefully and keep the plant in balance. Run it to a recipe and trust your inputs and then wait for the gold to come out, and more often than not it does.
WARREN THOMPSON: The last outstanding feature I wanted to discuss, Niel, was the notable increase, a massive increase actually, in your mineral reserves, which rose by 56%, if I’ve understood that correctly, just tell us what’s happened there?
NIEL PRETORIUS: Two things really, I think our understanding of our metallurgical process is at a point now where we could better forecast the extraction efficiency. So we can basically construct a life of mine plan based on a metallurgical efficiency assumption that supports the bulk of the remainder of our resource. We’ve had another look at our basic infrastructure, our engineering infrastructure and that’s adequate to also treat it at the required rate. So having run the numbers, having looked at our deposition capacity and the anticipated extraction efficiencies, which we believe we will achieve, and also extrapolating the consensus view on the gold price we came to the right set of numbers. There is plenty of material out there, we have a resource of 11.8 million ounces and only three million ounces at this stage are in reserve. So there’s still more opportunity for us to increase it even further but this adds another five years to what we are doing. Hopefully we can clean up many more sites in and around the Johannesburg area and also make enough money doing that to keep our investors interested.
WARREN THOMPSON: So just to get that right, it’s a reserve of three million ounces at the moment and a resource of 11.8 million ounces and what is that in terms of the actual amount of material that you’ve got to process there?
NIEL PRETORIUS: We have accessible material of roughly 700 million tons. At the moment we’ve got 300 million in reserve, the resource is actually quite a bit higher than 700 million, but realistically looking at what we can access and what we can process for the time being without having to spend a fortune on additional infrastructure and so forth, and I’m talking 20, 25, 30 years from now, we probably have around 700 million accessible tons.
WARREN THOMPSON: So it’s a business that’s going to be around for a long time.
NIEL PRETORIUS: It can be if it’s run properly, I think if we stick to our strategy of sustainable development, we try to create value overlap between the different capital stocks associated with sustainable development. I think if we remain patient and conservative, it is a business that’s being managed and run on a fairly conservative basis, then I think we can be around for many, many years. We’re doing just north of 24 million tons per annum at the moment, so that goes into 700 million tons how many times, that’s many, many years, long past my career span hopefully. The company has been around since 1895, so hopefully it can be around for another few decades.
WARREN THOMPSON: Great, we’ll leave it there. That was Niel Pretorius, the chief executive officer of DRDGold.