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Ergo comes back to life
Brendan Ryan
Posted: Thu, 03 Apr 2008
[miningmx.com] -- ASX-LISTED junior mining company Mintails kick-started the resurrection of East Rand Gold and Uranium (Ergo) - but DRDGOLD shareholders have reaped the benefits so far.
That's apparent from the movements in the share prices of both companies, which are busy re-establishing AngloGold Ashanti's former flagship dump retreatment operation around Springs on the East Rand.
In a nutshell, DRDGGOLD's share price has taken off while the price of Mintails quoted on the ASX has slumped. Either Australian investors know something the South Africans don't or they've got "a few kangaroos loose in the top paddock" and don't fully appreciate the project's potential.
Financial media and analysts were told at a recent site visit that commissioning of the plant should start from October and, all going to plan, the first gold bar should be poured before Christmas. The
first stage of the plan is to recover 75,000oz/year of gold from retreating an initial 171 million tonnes of material at a rate of 15m t/year over a forecast 12-year lifespan.
That's just the start of developments, because that volume of material is merely the first tranche of the 1.7 billion tonnes of dump material the two partners own on the East Rand. Not only can gold production be stepped up through an expansion to treat 30m t/year in total but the born-again Ergo could also recover uranium and sulphuric acid from the dumps.
And the partners couldn't have timed the development better in terms of the gold price.
The initial project - which will cost R477m - got the go-ahead based on a forecast gold price of R125,000/kg. The rand gold price has soared as high as R260,000/kg in recent weeks as the US dollar gold price went through US$1,000/oz and the rand weakened markedly, reaching the US$1/R8 level. The rand gold price still sits at around
R240,000/kg despite the recent pull back in the gold price to levels closer to $900/oz.
If those prices hold up that means a much faster payback period for the project. As a dump retreatment operation Ergo also has two major advantages over South Africa's typical deep underground gold mining operations. Ergo is less exposed to the Eskom factor, as it uses far less power and doesn't have to deal with the stringent safety issues that hamper production at underground mines.
It also has tighter control over costs. The project was originally estimated to operate at a cost of R18/t of material processed, which has risen to only R20,4/t treated.
The other key strategic issue is the avail-ability of water for the cannons that will recover the dump material by converting it into slurry that's then piped to the plant. Water is likely to be an increasingly scarce commodity but Ergo can source all it needs from the underground workings at DRDGGOLD's nearby ERPM
gold mine.
So it's not surprising that DRDGGOLD's price has taken off over the past three months, soaring from a bombed-out 350c to hit 1025c/share before pulling back to current levels around 850c.
Yet over the same period Mintails has carried on downwards, trapped in the declining trend that started in mid-2007. Over the past six months the price has fallen from A$0,76 to the current A$0,48/share.
There are no hard and fast explanations for movements in either share but there are strong grounds for linking the recovery at DRDGGOLD to the Ergo project.
Serious investor disenchantment with DRDGGOLD emerged two years ago after it put its Buffelsfontein division into liquidation. In the view of many gold investors, that cost DRDGGOLD its upside in terms of optionality to the gold price. That was followed by the collapse of its plans to establish viable gold operations in Australasia, which brought about DRDGGOLD's eventual return to South
Africa.
The company initially negotiated a 25% exposure to the Mintails venture and then increased that to 50% when the scope of its involvement was subsequently greatly increased. There's nothing else really to get excited about at DRDGGOLD, with its remaining, ageing deep-level mines described by JPMorgan analysts Steve Shepherd and Allan Cooke as "decrepit".
The rejuvenation of Ergo is the brainchild of mining entrepreneur Peter Skeat, who bought the mothballed Brakpan and Daggafontein plants from AngloGold Ashanti for R46,4m. Skeat then merged his holding company - Skeat Gold Mining - with Mintails in December 2006, following which Mintails teamed up with DRDGGOLD.
Suggestions for Mintails' underperformance include anti-South African investor sentiment and the fact that it's perceived to be a uranium producer rather than a gold company. Uranium producers have taken a pounding over the past six months.
Investor sentiment with regard to
the sector has turned even more negative following the unpleasant revelations over the true state of play at embattled Uranium One.
** Ryan holds shares in DRDGOLD and Mintails
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