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Mixed outlook for gold juniors
Brendan Ryan
Posted: Thu, 06 Mar 2008
[miningmx.com] -- RECORD rand gold prices holding up at around R230,000/kg should be boosting the fortunes of South Africa’s marginal gold miners. However, a number of factors are holding them back.
They include disappointing operating performances due to sky-high working costs, the need for hefty capital expenditure outlays and the impact of Eskom’s power cutbacks.
December quarterly numbers from DRDGOLD reported operating costs that remain stubbornly high.
Both DRDGOLD and Pamodzi Gold stress the need for continuing high levels of capital expenditure on the ageing mines they operate, while Eskom is threatening Simmer & Jack Mines’ ambitious growth plans.
“The breakdowns at ERPM demonstrate clearly the importance of ongoing, substantive infrastructure maintenance. In addition to growth, there’s no other more sensible application of the company’s healthy cash
reserves,” said DRDGOLD CEO John Sayers.
That’s not how JPMorgan analysts Allan Cooke and Steve Shepherd view the situation. They described DRDGOLD’s two underground mines – ERPM and Blyvooruitzicht – as “decrepit” and say there’s an “upside” risk to the estimated annual group capex bill of around R200m.
DRDGOLD’s surface operations recovering gold from tailings dumps are far more profitable
and are about to be expanded through a joint venture with Australian-listed Mintails.
JPMorgan has now turned negative on DRDGOLD’s prospects, preferring Harmony “for leveraged exposure to the rand gold price”. Yet DRDGOLD’s been by far the best performing South African gold share over the past few months, during which it leapt from 350c to 970c before pulling back to current levels around 917c/share.
Harmony CEO Graham Briggs provided a vote of confidence in Pamodzi last week when he confirmed the sale of Harmony’s Orkney shafts had been finalised on revised terms very much in Pamodzi’s favour. The original price of R550m – to be settled through cash, shares and a royalty payment – was dropped to R300m, with Harmony agreeing to take all of it in Pamodzi equity, which will give it a 32% stake in the company.
“By increasing our holding we’ll be able to share in the upside of the assets over a longer term, which is in line with our existing strategy,” said
Briggs.
Pamodzi CEO Peter Steenkamp provided another angle on Harmony’s apparent generosity when he said Harmony viewed Pamodzi “as a company it could sell assets to in future”.
Briggs had indicated in Harmony’s December quarter presentation the group might dispose of more of its marginal shafts but keep a minority stake in them so as to benefit from their upside to the gold price.
Pamodzi’s purchase of the President Steyn mine in the Free State became unconditional on 26 February, meaning the company now has another major turnaround situation to deal with.
COO Tony Murdoch Eaton pointed to Pamodzi’s success over the past year in steadily raising gold production from its Petrex mines on the East Rand, which it bought from Bema Gold, as indicative of the group’s abilities to deliver on its forecasts.
What investors will appreciate is the detailed way in which Pamodzi management has spelt out its 2008 forecasts on production, operating
costs and capital expenditure for each of its four operating mines.
Simmers ran into two major problems in the December quarter – the “lock up” of 151kg of gold in the newly-commissioned CIP (carbon-in-pulp) recovery plant at Buffelsfontein and Eskom’s power cuts. CEO Gordon Miller says Eskom’s 90% power allocation to the mines will be based on historical usage during the months of September and October last year.
Says Miller: “The issue for Simmers is that significant growth projects came on line post that period. By December 2007 the group had already exceeded its historical base load power as defined by Eskom and was preparing to ramp up power usage in line with the roll-out of those growth projects.”
Simmers is now exploring the possibility of generating its own power. However,
subsidiary First Uranium has already cut back on development work at the Ezulwini Mine and is now focused on refurbishing the shaft.
On the brighter side,
Simmers was awarded new-order mining rights for the Frankfort group of mines, meaning it can start operations at the Elandsdrift heap leach pad – the pilot project for Simmers’ overall plans to develop large scale opencast gold mining operations in the Pilgrim’s Rest/Sabie region of Mpumalanga. Heap leaching doesn’t require Eskom power.
* The writer owns shares in Simmers and DRDGOLD.
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