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Gold bugs pass over DRDGOLD
David McKay
Posted: Fri, 09 Dec 2005
[miningmx.com] -- DRDGOLD, once a light-bearer for leverage in the gold price, has found itself roundly ignored by investors this week who have chased other gold stocks amid new price highs for the metal.
South African analysts said that DRDGOLD’s decision to liquidate its 300,000 oz/year North West province assets in March had removed most of the best leverage from the group. It retains an interest in Blyvooruitzicht and ERPM, but now more than half of its gold output is outside South Africa.
Old mines have less flexibility to lower their costs but when the gold price runs, their profitability increases exponentially. Firms that own these assets possess what is sometimes termed gold optionality.
Simmers & Jack Mines, chaired by Roger Kebble, bought the North West mines in October for about R45m. According to analysts, Simmers & Jack Mines now takes on the mantle as South
Africa’s marginal gold play.
“They’ve sold off their gearing and would we’d rather buy a share like Simmers & Jack Mines,” said Leon Esterhuizen, an analyst for Investec Securities. “Somebody overseas is catching on to this.”
Gold traded earlier today at $525/oz, meeting a forecast set down by Esterhuizen’s UK colleague, John Clemmow. He said gold would trade at this level before the year-end in an interview with Miningmx last week.
After selling last week, South African gold counters AngloGold Ashanti, Gold Fields and Harmony gained 7%, 11.3% and 9.8% respectively in the last five days. DRDGOLD’s share price, however, has failed to respond. It opened on Monday at about $1.35/share and will end the week flat.
Ilja Graulich, investor relations manager for DRDGOLD, said misapprehensions about the group’s recent decision to reverse its international assets into Australian listed Emperor
Gold had affected the group’s share price.
“Investors think that we’ve sold our international assets for $230m to Emperor Gold. There’s confusion in the market and it needs to catch a bit of a wake-up,” he said.
Georges Lequime, an analyst for RBC Capital Markets, said however that DRDGOLD’s new corporate structure would work against it during gold price spikes. “Investors are starting to see that DRDGOLD is just a holding company for the South African assets and Emperor Gold.
“But most of the value is in Emperor Gold after selling off many of the South African assets. So if you want to exposure to DRDGOLD you might as well just buy Emperor,” he said.
DRDGOLD closed at $1.32/share. Emperor Mines, however, had gained 11.5% in trade on the Sydney Stock Exchange today.
“It’s possible that the other South African stocks are just playing catch up since we ran hard from about six months ago,” Graulich said.
Another concern about
DRDGOLD is that hedge fund, Baker Steel, which invested $15m in the company in April buying about 15 million shares, is probably looking to take profits. “Volumes have still been good in DRDGOLD but it’s probably selling that is constraining the price,” an unnamed analyst said.
“The company has changed a great deal,” said Nick Goodwin, an analyst for South African stockbroker, T-Sec. “They’ve gotten rid of their North West province assets and have lost their flavour a lot.”
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