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DRDGOLD (DRD) - Super High Margin Gold Tailings

September 30 2020, 14:41 GMT+01:00

DRDGOLD (DRD)

  • NYSE: DRD
  • Shares Outstanding: 86.46M
  • Share price $12.17 (29.09.2020)
  • Market Cap: $1.052B

DRDGOLD Ltd. engages in the business of retreatment of surface gold. It operates through the following segments: Ergo, FWGR, and Other Reconciling Items. The Ergo segment treats slime dams and sand dumps to the south of Johannesburg's central business district as well as the East and Central Rand goldfields. The FWGR segment focuses on the slime dams in the West Rand goldfields. The company was founded on February 16, 1895, and is headquartered in Rosebank, South Africa.

The company pioneered mining methods in South Africa. Pretorius states the company has now come full-circle and is focusing exclusively on the recycling and re-mining of tailings, both around the Johannesburg area and now, more recently, the Carletonville area. DRDGOLD attempts to provide a unique combination of processing extremely high volumes of material and nano-extraction methods.

We Discuss:

  1. 1:11 - Situation in South Africa
  2. 3:13 - Company Overview
  3. 4:16 - Ergo Project Progress Update
  4. 6:45 - Processing Tailings: Efficiency & Technology
  5. 20:19 - Problems for Growth: Mitigating Costs & Grade
  6. 24:15 - Pipeline of Projects: Discussing Deals, Partnerships & Terms
  7. 36:22 - Differentiation and Uniqueness: ESG Component
  8. 38:30 - Share Trading & Market Views on Liquidit

Matthew Gordon: Give us a 1-minute overview of the business and I'll pick it up from there?

Niel Pretorius: DRD Gold has been around for as long as the Gold industry has been around South Africa. It started out from the 1890s. it has evolved completely into surface reclamation. We recycle Gold tailings in and around the Johannesburg area. Recently also in the more Witwatersrand part of production area of South Africa. Our company is owned 51% by Sibanye Stillwater who acquired some additional assets. Then for the rest, it's held through the listing in Johannesburg and also on the New York Stock Exchange.

Matthew Gordon: Can you give us an update on where you are at with that project?

Niel Pretorius: Ergo is the mothership of the organisation. It operates in 2 prongs: one is of a low volume and then the other one is a much larger low-grade plot. It produces material or recycles material from 7 sites, give or take. This is slimes and slag that is pumped to the different fonts, where it gets recycled and then deposited onto the large tailing’s deposition. That deposition facility is to be increased in size in order to extend the life of Ergo and to maintain its current production run rate over time. It's a high-volume set up with an extraction efficiency recovery of 200 parts per billion of the material that gets put through this pump. Our waste operations, that's the one that we acquired from Sibanye Stillwater. Much lower volume - about 500,000 tons per day. That is the first phase, over the next 3 years that's going to be upscaled to also north of 1 tons a month. That requires an additional tailings deposition facility and then it too will have a life of 18, potentially 23 years. The tailings facility that we're building is large enough for a regional consolidation of tailings, and that's really for the next generation of management to at least have something that was built in such a way that it can play a similar role to Ergo where it is big enough for the consolidation beyond the current resource, or what the resources were 10 years ago when the business started.

Matthew Gordon: Can you explain in a little more detail about how your process works and perhaps give us more of a clue about what's unique about you?

Niel Pretorius:  I don't think anybody else moves more tons per employee than we do. The features that differentiate our business in the mining environment are mechanisation, technology, automation. The setup of this plant, being a macro volume environment with almost a nano extraction efficiency requirement meaning that we need to set up this thing in such a way that it needs very little human intervention. Our approach in terms of technology is that the human element is still the dominant part of this human and machine interface. We place smart technology at the disposal of smart individuals. That’s the whole model, but it's extensively automated. Its technology driven. We collect data from 40,000 different data collection points at the Ergo plant. This information is analysed on an ongoing basis. You could literally follow every key dynamic that can impact the efficiency of this plant on a 24/7 basis that gets analysed on a day to day basis. That's the sort of thing that enables one to maintain production even when you have these interruptions or disruptions associated with the pandemic. Because it's not a labour-intensive environment, social distancing is our reality; people do not work in close proximity. A lot of the stuff that happens is done with remote-controlled automatic devices, etc, but that's helped us a lot. That's one of the reasons why Covid for us hasn't been that disruptive. We did interrupt operations for a 10-day period when the lockdown started in South Africa, but that was really to make absolutely sure that the changes in behaviour required to enforce proper social distancing and ensure that everybody's been adequately counselled in terms of using sanitizer, etc, and also to not have to use public transport. We consider that to be a major risk; for employees to have to take public transport to come to work and go back again. The commute is now all done with private transportation.

We had a 10-day disruption then we incrementally went back into the workplace. Some of the sites were up and running very quickly, in others we had to take a more systematic approach. If you were to look at our numbers, and we released those a few weeks ago, you can see the reduction in tonnage and in production, obviously, is lopsided towards the negative but which was offset and positively affected by increases in Gold prices as a consequence of global reaction to the lockdown.

In terms of financial performance, it was an incredible period for us. We've seen margins we’ve never seen before, and with the business that is geared for this sort of environment, that was able to overcome most of the challenges. We are very proud of how our personnel responded to the pandemic. Out of just more than 3,000 employees, we had fewer than 30 cases and nobody has passed away as a consequence of that. At the moment, with the lockdown level way down, we only have 2 positive cases that haven't fully recovered. Key to the whole thing was the response of our personnel.

Matthew Gordon: What does that data tell you now? Has anything changed in the last year since we spoke?

Niel Pretorius: Not really, no. The data collection, or the way in which we manage information, it's not so much improved the efficiency as enabling us to keep Ergo in a stable state. There are fewer distractions, fewer changes and fluctuations in performance. Because the way that information has been looked at you don't really have a reporting sort of climate; the conversations taking place are analytical because you're not looking for – are we within range? We know we are in range because that information is readily available to everybody. What the conversation typically looks like is - what are these numbers telling us? How can we get it slightly narrower? How can we make this range even tighter? What is the impact of this dynamic? Have we fully considered the impact of this dynamic? The next step for us is to go into big data analysis. At the moment, we are maintaining the relationship and interface between line of sight dynamics, 7 or 8 dynamics within the plant itself. The big data could tell us something that's happened in one of the remote corners of the operation is finding its way and amplifying certain responses over a period of 2, 3, 4-months’ performance. That's going to be an exciting new step for us; analysing the data and setting the plats up accordingly. If you multiply everything by 2 million, in the tiniest of changes, it could have a profound effect on the performance of the business. Having said that, those changes are small, incremental and they're informed by analytical conversations as opposed to your typical command report-type of conversation that you have in a mining environment.

The way forward for us, because the quality of the data gives us a pretty good idea of the balance we need to maintain in terms of throughput rate -  time spent in the plant,  volumes throughput, it gives us a very good idea as to how we should balance the availability of water and where the key risks are in terms of cost. A big step for us over the foreseeable future, and we're talking now, is dealing with the risk of quality of electricity supply and also cost uncertainty around electricity supply. Obviously, the electricity supplier could fold in Africa, then it takes the entire economy with it. That is a very real risk in the South African economy. Those things are linked, but that doesn't mean that it cannot do something about immediate risks posed by the quality of electricity supply and the cost associated with that. We set up a hybrid arrangement with both storage as well as power generation by way of solar panels. We are setting up significant, and these are modular in design, the battery storage capacity gets charged during off-peak periods and also by the solar panels in place. On the one hand, it acts as a shield against peak power tariffs; if you charge them during off-peak and draw from those batteries during peak, that means that you avoid by and large a high tariff of peak periods of the day. They are significantly high tariffs, so you basically supply the entire project for the CAPEX on that basis. It also smooths the delivery of power; if you have panels instrumented to the peak, as we are, these are sensitive devices so the spikes, the surges and the drops in power supply, the quality of power delivery are bad for your instrumentation. If it goes through these batteries first, it means that you have a smooth delivery. It also acts as a power backup if there's a sudden drop in power. Our arrangement with utilities is that we don't need to reduce the power by 10%-15%, we can do that by just switching certain components on and off. The power bank will shield us against that as well.

That's the near-term approach in terms of delivery. Because of the quality of the information, we know what the impact is going to be. We know how long we need to be around in order to justify this. We can assess value to know whether it's worth our while, etc. Systemically, this is the way that we can look at every aspect of the business; we break down the economics of our throughput. We break it down to on a per ton basis, extraction per ton; everything we do is look at net worth.

Of course, if you look at the numbers over the last year, 1kg was the average for the year up until June, we reported record numbers. The Gold price is now stuck just north of 1M rand p/kg. Whilst the price is still hovering around 100 grand. There hasn't been a significant impact on the cost because such a large percentage of our costs haven’t risen. You do the numbers and then you see how on a per ton basis, these margins have opened up and stayed open as a consequence of what's been happening in the Gold price environment, but also relative to our ability to respond to the impact of COVID.

Matthew Gordon: I know that's an ongoing process of evaluation. Is that something you've got an answer for now?

Niel Pretorius: Yes, we are expanding the site of our tailings centre. We need to make sure that we have sufficient capacity in tailings deposition to continue to treat the material we need to in order to maintain production.

A few years into the future, compared to where we are now, in order to maintain throughput rate, to ensure you have the right sort of mix, the right combination of material to maintain a sustainable head grade, there's an ongoing process of opening up new recovery sites and systematic closing down of those that are finished. You go through different cycles: not all tailings dams fit the size and also through different phases of complexity. The more sites you have, the more complicated your model is and the higher your prices are. At the moment, for example, we are treating material from around 7 sites where we are recovering material from. That's probably as complicated as it's going to get. Over the next few years, the number of sites we will be recovering from, in accordance with the mine plan, the near-future mine plan will reduce. Instead of mining from 7 sites, we will be mining from 4 sites. They will be higher and volume but slightly lower in grade. That's where the offset comes in: less complexity, fewer sites, which means your per ton costs drop. Then of course, because the grades slightly lower your revenue per turn would also adjust. On the whole, that pretty much gives you, I wouldn't call it a flat line, but that's you how you maintain sustainability - through the mix of material and the development of different sites. You do not have as many moving parts.

3 years from now, we'll have fewer moving parts, slightly lower recovery per ton, but fewer moving parts, which lowers cost per ton.

Matthew Gordon: We talked previously about Far West. How things are going there, how the numbers seem to be good. But anything we should be aware of?

Niel Pretorius: Absolutely. DRD Gold's project pipeline is pretty much paid out and we have sites that are going to be developed. At the Far West operation, we started out with phase 1 initially in order to get into production sooner rather than later, but phase 1 is sustainable in its own right, but you couldn't really go beyond 12-years of production mining only with our existing infrastructure. We are keen to get into the 2nd phase, which is the upgrading of volume throughput to just north of 1M tons. They also advised a larger tailings deposition facility and that was part of what we positioned for in the transaction: early phase, lower volume, high-grade production in the longer term to get it to 18 to 23 years. The second phase is a bigger plant and bigger deposition, provided obviously, that the investment climate remains positive.

The part that I find exciting about the relationship of all the parts are the short-term planning; you need planning in the transaction, and this is now emerging as this relationship is developing. There are still a lot of assets within the Sibanye portfolio that are not core assets in terms of strategy, in terms of mining obviously is more focused on people underground, in terms of the Gold mines they have. Increasingly, we could identify some of those and bring about a larger scale consolidation of service tailings. Also, this is something that I think is definitely going to be picking up momentum is venturing into other metals, one of the largest Platinum producers and this is certainly something that at this point remains a target, is how assets which are perfectly suitable for surface processing are not given the recognition that putting it in a bespoke brand that is associated with the recycling of tailings environmental clean-up, the market premium that is attributed to doing that. It's definitely a conversation that we would want to accelerate now that we have a little more freedom of movement.

Matthew Gordon: They're going to look at how much money you're making and structure a new type of deal aren't they?

Niel Pretorius: Remember - because they're an interested party, they have a large stake, every transaction comes to a very significant script. It has to be independently verified, etc. Sibanye is mindful of how important good governance is in maintaining the credibility of the strategy. That is governance we also closely follow. Their stake in DRD Gold is worth what the other investors say it is worth it. They don't trade issues. It's the rest of the market that trades the issues, and if the market gets the sense that there is a new interference or funny business, that's going to find its way into the valuation stock. The other sections are looked at obviously, with regard to the potential value they might have, but it is very significant for what we want to do.

In terms of Platinum, I do believe that the environment is different compared to Gold. With Gold, you have exposure to the Gold price. You sell it at the spot, it goes to the metals exchange, bullion banks, etc It's not a particularly complex trading environment. Platinum and other PGM metals, that's a completely different scenario. They get varied relations with clients. They use off-take agreements. This is often Palladium-based, but they have different users, consumers and buyers of these metals which is far more complicated. That's not something we have a lot of experience with. Looking at these transactions, one would take a closer look at exactly what it is that we will do in the value chain. What is it that we will produce? Is it going to be a concentrate? Is it going to be a final product? Are we going to be selling to Sibanye? Are we going to be selling to the end client etc? Along those lines, we will be able to model these transactions and they are capable of being modelled. It means that you would probably not see the same potential multiple that we saw with the Gold transaction because those were carrying a -600 million negative value in terms of rotation rate etc. It wasn't within the context of its structured existing series of relationships or system of trading, whereas for Platinum it is completely different. There are existing arrangements, existing clients, etc. Somehow, we need to find a way of fitting into this larger process to add additional value to an existing platform that's going to be easier to model. I think it will be quite simple to do to scrutinize those from a governance perspective, but maybe not quite as powerful in multiple dynamics, or multiple in terms of market cap.

That is my early take on it. The market might take a completely different view. They might say hey, this is now multiple commodities, diversification of risk, different economic cycles. This is actually starting to pick up a bit of momentum. Maybe there's what's called a growth dividend – that’s an accepted term in investment.

Matthew Gordon: How do you ensure that you can secure that line of forward-looking revenue from them?

Niel Pretorius: The first phase of the Far West was very important for exactly that reason. They are not obliged to use anything, but now I can go and do a transaction with whomever they please and we're not the only kid on the block, there are other players as well. Delivering to the expectations that you create around Far West Gold project was very important to us: we wanted to establish credibility to deliver to the expectations. In terms of the greater value composite, I believe that the spiel on the website and how they present themselves, their key value is how mining improves lives. If you look at the social investment mantra that we developed over time, we want to enhance the quality of life for those who live in proximity to our operations. There was alignment even before there was a relationship. I see in how it presents the DRD Gold as part of its greater group, there's a lot of focus on the ESG aspect of our operations. The fact that rehabilitation through mining is such an important part of our brand identity, there's a consistency in values which they present so I don't quite know how Sibanye sees us in terms of how important the economic success of the company is the main priority for them. I know that the things we do in terms of sustainability and environmental clean-up, finding solutions for the social impacts of mining. Mining in such a way that it's increasingly energy-friendly whilst also working-wise, making sure that the impact of mining operations is contained, the environmental impact. They don't impact on surrounding communities, etc. Those are incredibly important values for the Sibanye Group. The fact that there is now a company, a group member, that core to its strategy, that lives those values, and those values are as important as the commercial success of the business. The commercial success is more of a consequence of the very deliberate pursuit of many of those valuable components. That is an important feature of that relationship.

Matthew Gordon: Have the conversations happened already where they said, you are the one for us moving forward? Are those deals still to be negotiated?

Niel Pretorius: I'm not sure there's anybody else who has this as core to their strategic thinking. Sustainable development as a whole feature of our strategic thinking of how it informs the deployment of resources and capital, I do not know there's been that consistency in approach and strategy. It is embedded in the DNA of our company. It's not to say that we have it 100% done; there are issues that still need to be fixed. We are sitting on that site that is 100 years old. It is going to take time, but I think you can't fake your way through sustainable development.  The moment you start treating it as marketing and not a core value, you're going to be called out. It's hard enough as it is. I know in the hearts and the minds of my colleagues how important these things are, and we still come under criticism. We are still blamed for doing this, that and the following. If it's superficial if it's artificial - I'm sorry - you're not going to get anywhere.

I think Sibanye may have spotted that there is integrity in that mantra, that there's integrity in our strategy that there's a genuine pursuit of those values. I think it resonates with them; they believe those things and they want to be invested in a company that is giving those outcomes.

Matthew Gordon: Do you think that Sibanye should actually give up some of their position to allow a few more shares to trade in the marketplace because despite having a good year, your volumes of trade could be better if there's a bit more float out there?

Niel Pretorius: The fact that Sibanye has a controlling stake in the company is something the market likes. A big part of the increase in our market cap has been as a consequence of that. Sibanye invested just more than 1Bn Rand capital of our company, no strings attached, at the beginning of the year. There was no expectation of special dividends or anything like that. Sibanye wanted to have a controlling stake in the company, and we will apply that towards the growth and expansion of our company. If they were to reduce below there, I think the market might wonder why.

If you were to listen to any presentation by the Sibanye board executive on where they are going to go, it reminded me of the early days of Randgold, when you had these phases and this is what we're going to do and this is the next thing. There's an energy and I think the market likes that energy and that we are associated with it. Lobbyists are aware that ESG and sustainable development is a core value. There's an excitement about what's going to happen next. To be associated with it, this expectation of growth, innovation something new is very valuable.

I think it's funny; the way that our stock is viewed by the market, you'd be silly not to share that with the members. Sibanye is doing things and we are right there in the slipstream; wherever they go, we will be going with them.

Matthew Gordon: Do you think the market thinks that you were a take-out target for Sibanye? Is that what they are reading into it?

Niel Pretorius: I don't think so. I think they see us as right there in the slipstream. As Sibanye grows, there will be opportunities for us to also grow, spread our wings and find new exciting things to do. We'll be right there.

Matthew Gordon: I think it is a fantastic company, you've done some great things in the last couple of years. Keep going. I'll speak to you soon. Thank you.

Niel Pretorius Thanks very much for the opportunity, I enjoyed this conversation. Thank you.

Company Website: https://www.drdgold.com/

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Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

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