DRDGold says it will not need rights issue to fund R2bn WRTRP

9
1050
Niël Pretorius. CEO, DRDGold. Pic: Martin Rhodes © Martin Rhodes

DRDGOLD estimated the development of the West Rand Tailings Retreatment Project (WRTRP) would require R2bn in capital – a sum it could finance using cash and debt.

The R2.2bn firm which extracts remnant gold from surface dumps of previously mined ore, is to mine Sibanye-Stillwater’s WRTRP following an agreement between the two to form a partnership. In return for vending in some of its surface resources and infrastructure, Sibanye-Stillwater will take a 38% stake in DRDGold with a 24 month option to increase this investment to 50.1%.

Niël Pretorius, CEO of DRDGold, told analysts and media today during a presentation setting out the partnership that it would take R200m to “… get the facility up and going”. Subsequent mining of the surface gold – estimated to yield some 43 tonnes of gold over a 15 to 20-year period – would cost R2bn, largely spent on tailings facility, said Pretorius.

Responding to an analyst question, Pretorius said it was unlikely the firm would have to tap shareholders for funds. “We have spent R1.3bn over last few years without having to go to the market. I am confident that given the project and the current price levels, we will comfortably support the capital required,” he said.

According to Johann Steyn, an analyst at Citi, capital expenditure may be as much as R4.2bn to fully develop WRTRP, however. Whilst he said there was little to dislike in agreement between Sibanye-Stillwater and DRDGold, there were still risks.

“The main risk, in our view, is if DRD is unable to fully fund the capital commitments for the WRTRP from internal funds and debt, in which case shareholders, including Sibanye-Stillwater, may be approached for additional funding. Reinvesting liquid capital back into South Africa may be a negative for most investors,” he said.

As of its year-end which closed on June 30, DRDGold’s net cash position decreased by R98m to R254m. It reported a 5% reduction in yield and production of 137,000 ounces which was 4% lower year-on-year.

The market generally liked the deal based on share price performance. Shares in DRDGold were up 2% in early morning trade in Johannesburg while Sibanye-Stillwater was 3% higher.

From a DRDGold perspective, gaining access to Sibanye-Stillwater’s WRTRP assets, which are the slimes at the Driefontein and Kloof gold mines near Carletonville west of Johannesburg, addresses concerns the market had about the quality and life of its existing resources.

The main concern is that in deciding to generate replacement resources organically, the company has adopted complex, more expensive technology on an all-in sustaining cost (AISC) basis than its peers. Its yield is also lower than its peers – a function of its limited growth options.

Pretorius acknowledged the company had struggled to grow. “We have had many doors closed in our face because people perceive us to be a small company,” he said. “We are very grateful that Sibanye did not do this.”

SHAREHOLDER VOTE

Despite the merits of the transaction, its success does depend on DRDGold shareholders waiving a mandatory offer by Sibanye-Stillwater for their shares. According to South African law, a company must make an offer to minority shareholders if it builds 35% or more in a certain company. DRDGold is issuing new shares to Sibanye-Stillwater.

Asked if the transaction would proceed without the waiver, Neal Froneman, Sibanye-Stillwater CEO, said: “It is not intended to make a follow on offer to minorities. That is not going to happen”. The transaction would not proceed without the waiver, he said.

Asked about the option to proceed to outright control of DRDGold, Froneman said: “We have got two years to do a follow on acquisition. It is something we will watch. At the moment, we are very mindful of our leveraged position, but in two years time we could look differently at it”. Sibanye-Stillwater had net debt of $1.69bn (R23.5bn) as of June 30. This equates to net debt to earnings before interest, taxes, depreciation and amortisation of 2.6:1 – a level described by the group earlier this year as “temporarily elevated”. It represented a more than 300% increase in net debt year-on-year.

9 COMMENTS

  1. This looks like a win win for both companies and is even good for SA at a time when most investors and corporates are scared to invest. With the Rand Gold price looking like it could go above R600k/kg soon the prospects look good.

  2. Hi David
    I believe the dumps being acquired are only the slimes dams.
    The rock dumps are specifically excluded.
    Would be great if management can confirm this.

  3. Dear Fellow Readers,

    Everybody seems to have had their take at this mini-deal ( by Sibanye standards). Now is for yours truly to comment. Here are the key factors that underlie this transaction:

    1. DRD is ceding 38% equity value for an incremental 19% attributable increase in 2P ounces. This is NOT good dealing! It dilutes its current shareholders disproportionately, EVEN when accounting to superior operating margins of the Driefontein slimes dumps.
    2. The phased approach of this transaction is the only logical way, but i posit that its informed by Sibanye insisting that this slimes dumps MUST be developed. Furthermore, on its best years , DRD only generates avg FCF= $20M/yr, it was OCF -ve for FY17. So where is the money going to come from? Maybe Debt?
    3. Envisaged Phase 2 , that is estimated >R2Bn in 2 yrs is just NOT going to happen , even if Sibanye subscribes for optional shares ( at max 10% discount). It is a bridge too far for DRD’s balance sheet, period!

    For Sibanye:

    1. I know Neal Froneman can be creative, BUT to value a transaction of asset-for-shares on closing day shareprice is ludicrous. Yes , 38% of combined-agreed NPV/ BV/ EV BUT DON’T use previous day closing price. It shows desperation to say good news and maybe dare I say misleading!
    2. The disruptive & abnoxious U3O8 story is NOW officially dead. According to previous analyst ppt (2014 – 2016), Driefontein dumps ( gold) accounted for some 55% of the NPV ( R3,4Bn @ Au =R600/k) of the project. This is a good deal because the burden of building (funding the CapEx) this project is now with DRD. Phase 1&2 of WRTRP were estimated at CapEx = R4Bn ( with U3O8 plant).
    3. So if you account for current status of the deal, thats 38% shareholding, Sibanye will NOW be able to partake in 2,19Moz production for its 2,75Moz 2P contribution WITHOUT the CapEx (R2Bn -R3Bn ) in 3 yrs. THAT IS SMART DEALING!

    I sense that DRD was desperate for this deal. This does NOT augur well for its current operations. Overall, Sibanye got superior terms on this Deal!

  4. This is an interesting move. I suspect that there is a plan to consolidate some of the PGM tailings ops and resources, too, in the longer term. This probably makes good sense since it’s doubtful that much value is recognised at the moment for these. Moreover, there are a number of other outfits involved in tailings pretreatment that rarely if ever appear on the radar screens that may be interesting to Mr Froneman’s M&A team (don’t ever underestimate these guys, they are properly smart). One that springs to mind immediately is Sylvania Platinum, which removes PGMs from run of mine chrome ore and chrome mining tailings. It is one of the lowest cost PGM producers and trades on the London AIM market with a trailing PE multiple of 5.75x. Cash represents more than 20% of its $50m market cap. Who says markets are efficient? And you get Stuart Murray into the bargain. Our market became less colourful when he left for the Indian Ocean islands!

    • Dear Steve,

      I appreciate your thoughts & analysis.

      I am a PGM realist. Currently, I am bullish the PGM industry. Don’t worry too much, the sector will rebound BUT NOT when erroneous analysis is peddled. It smacks of desperation in the extreme.

      I am at odds with your analysis for the following reasons :
      1. Sibanye’s Platinum Mile consists 2P = 3,1Moz 4E. This are being processed at 20Koz/y at R15/t for FCF = R20M ( yes, R20Million Rands ), that is at AISC = $510/oz 4E. Why would they buy Sylvania which produces at 70Koz @ AISC= $507 /oz, without obvious synergies? It will NOT be value accretive. At 3,1Moz 2P , Sibanye has got PLENTY of what Sylvania has got! IT WILL BE A DUMB DEAL!
      2. Sylvania has MCap = ± $48M, generates a mere FCF= $8/yr on a production base = 61Koz. From 1 aforementioned, Platinum Mile has better operating margins. I just DONT see why SBGL will want to introduce this marginal PGM production into their profile. IT WILL BE FOOLISH & UNDERMINE THEIR VALUATION UNNECESSARILY!
      3. As per the deal with DRD, SBGL wants to make its Production profile extremely free cash flow generative. So marginal production , in PGM or Gold, will be culled WITHOUT living profitable stuff on the table. The mantra is : “Remove the marginal distractive stuff from the production profile so that valuation multiples can improve”.
      4. I am a fan of Stuart Murray’s promotional antics ( The gent raised serious amounts of money using Kroondal Mine as a basis). BUT i think his sell-by date has passed. Let him enjoy his retirement and let the young guns get-on with extracting value from the PGM assets. The bounty is still there to be had, for the wise!

      I happen to know the M&A team at SBGL well, and as such don’t see them falling for such a clear value distractive trap, even for $50M. Sylvania lacks the scale to attract investors with deep pockets. I would rather have Sylvania using the spare meagre cash to acquire more dumps ( akin to them buying Phoenix from Panafrican Resources) , including buying Platinum Mile from Sibanye NOT Sibanye buying THEM.

      Your Truly,
      Goldspeculator

      • Your points are well made, and well taken. Technically you are probably right.

        Part of the point, for me, is to chrysalis value, though. And I don’t think that’s happening where you have unlisted subsidiaries like Platinum Mile (ownership is complicated, too). I wasn’t suggesting that Stillwater Sibanye subsume these assets – I was thinking DRD. And Richard and the team at Sibanye, I suspect, would be involve in analysing and recommending a course of action for DRD. And knowing Neal, I dare say DRD would be charged for the team’s time.

        Finally, I know these guys too – I had the privilege of working with them back in 2014. Otherwise I couldn’t have offered the view that they were extremely smart, in my view.

        Why are you afraid to write under your real name, by the way?

        • Dear Steve,

          I am NOT afraid of writing my real name, which is Goldspeculator.

          The inherent value in slimes reclamation , and the like, is extremely geared to the prevailing realised prices vis-a-vis unit costs. DRD maybe, BUT if we are honest they have serious operational issues currently. here is my comment on their FY17 results :

          ” I will benchmark DRD operations with Mine Waste Solutions (MWS) ( old Chemwes of First Uranium , now AngloGold-Ashanti). The capacities are operated similarly at ± 24 Mtpy although dumps geologies ( grade recoveries, granulometry, deleterious elements etc) may differ. MWS , over the reporting period of DRD ( Jun 16-Jun 17), has the following operations stats :
          Tonnage = 25,7Mt
          Gold Prod = 96Koz
          Gold Yield Grade = 0,12 g/t
          Unit Costs = R49/t
          FCF = R675M

          MWS operations, which is a similar business operations as DRD, generated +ve FCF= R675M in contrast with DRDGold which made a -ve FCF= -R45M over the same period. This despite DRDGold having superior grade yield of 0,17 g/t ( FY16: 0,18 g/t), thus high gold production at 137Koz. As I have said before, in precious metal mining, costs are associated with handling tons of rocks NOT product. The contrast in unit costs is more stark, with MWS at R49/t and DRDGold = R84/t (FY16: R80/t) thus 42% lower. So , GRADE & OPEX go hand-in-hand in the slimes reclamation business. MWS is also conducting site/floor cleanup operations at their Buffels & Harties sites, thus its NO excuse for DRD. Frankly, their operations are lousily managed with excessive overheads.”

          So , I dont buy the notion that they will bring anything superior to SBGL tailings APART from looking for cash to bringing them to production!

          True, Angloplats still has a 50% stake , just like in the Kroondal Ops etc. Platinum Mile is in wrong hands with SBGL/Angloplats BUT belong with Sylvania if they can come-up with the cash. Platinum Mile will continue to generate cash ( given low unit costs) BUT NOT the mega-Cash sought by SBGL/AngloPlat institutional shareholders!
          So disposing it , should NOT be hassle-free.

          AS you’ll recall, AngloPlats authorised RPM Tailings Project (Platinum Mile) in 2002, for 140Koz/yr to close the immediate production growth gap given its perceived short development cycle to benefit from PGM market upswing. IT WAS NEVER A PERMANENT PORTFOLIO ASSET FOR Angloplat.

          Just to illustrate my point further, at 3Q FY17 , Invested Capital of SBGL= $4,8Bn & AngloPlat = $4,5Bn , thus combined $9,3Bn….so a FCF = R40M/yr Asset is a rounding error UNWORTHY of management attention NOR cost-saving initiative!

          Best regards
          Goldspeculator

LEAVE A REPLY