Pretorius defends Sibanye deal against claim it was too cheap

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Niel Pretorius, CEO, DRDGold

THE financial benefits for DRDGold shareholders from the deal struck with Sibanye-Stillwater (Sibanye) to acquire the West Rand tailings retreatment project outweigh the penalty of selling control of DRDGold at a discount.

That was the view of DRDGold CEO, Niël Pretorius, when quizzed on the deal at today’s presentation of the company’s interim results for the six months to end-December. Pretorius stressed how the deal would transform DRDGold which he described as “… a good business, but it has a limited life of mine and it has a single asset”. He added: “Your share price trades not on what it is worth today, but on what the market thinks it is going to be worth tomorrow”.

Pretorius said DRDGold had a “… very predictable production and revenue flow depending on your gold price assumptions” and commented the company’s share price would only be stimulated by movements in the gold price.

In terms of the deal, which is subject to approval by DRDGold shareholders, Sibanye will acquire a 38% stake in DRDGold in return for portions of its West Rand tailings assets. But a condition precedent is that Sibanye be granted a waiver on the requirement to make an offer to all DRDGold shareholders which is normally required when the stake acquired in a company goes over 35%.

Sibanye also wants an option to increase its shareholding to 50.1% during the 24 months following implementation of the acquisition.

Pretorius confirmed today that even though Sibanye might raise its stake to 50.1% – giving it outright control – there would still be no requirement to make an offer to minorities.

Asked whether this amounted to selling DRDGold to Sibanye ‘on the cheap’, Pretorius replied: “It does appear like that and that is certainly something that has been raised by a number of people looking at the terms that have been announced up until now.

“The way I have approached it is that this is the price to get the asset. If you want this asset then this is what you will have to pay. Sibanye did not put this asset out to a competitive bid process.

“We went to them. They said: ‘We are not just going to give it away. We want to retain a significant proportion of the future upside’. If I were in Sibanye’s shoes, I would have insisted on at least that sort of participation.

“The moment that we do this deal – and assuming Sibanye does not exercise the option just yet – then for a 38% sacrifice in equity our existing shareholders get to own 62% of a R2.7bn NPV (net present value on the extended Phase 1 of the West Rand Tailings Retreatment Project (WRTRP)).

“That, in anybody’s language, is value accretive. It is something that does give some impetus to the share price now. The fact that you have a second footprint with a resource of close to three million ounces of gold and (the potential) to open up the rest of that area … that too is the sort of impetus than can give a bit of traction to your share price.

“So you compare the size and prospects of what we have now with the size, prospects and value of what we are bringing in and we can demonstrate to those shareholders – who are not too concerned about issues of control – that there is a very real prospect of much enhanced earnings. I don’t think we are giving anything away”.

But Nedbank mining equities analyst Leon Esterhuizen told Pretorius at the presentation that: “I don’t agree with you. Giving away control of your company is a big thing. Sibanye will call the shots”.

3 COMMENTS

  1. DRD was facing a dwindling resource, limited life and huge capex to increase their tailings storage capacity on the east rand.
    Sibanye was facing massive capex to get the tailings project off the ground – plus they were apprehensive to commit capital to the project – grades are low, operational efficiency is critical – DRD has that experience and team.
    This is a marriage made in heaven. Its good for both companies and good for South Africa.
    Giving away control is better than having a limited lifespan company.

  2. Niel’s a smart guy and needs more to keep him amused. He’ll get more out of Sibanye’s tailings assets than his name’s sake would. I think it’s a great move for both sides. Nice to see you moving out of your comfort zone at last, Niel. Your talent has been under-employed for way too long, in my view.

  3. ( Note to Editor: Pls do NOT edit my comments . I absolve you of any harm or offence caused by such comments. These are solely my views and NOT views of Miningmx.com)

    Dear Fellow Readers,

    I voluntarily, with strong feeling of obligation, hereby wish to assist the CEO of DRDGold with economics maths of the transaction. I do understand that Lawyers DO NOT necessarily practice Maths ( but rather time billing clients) as a subject . I will use his own numbers & assumptions because if I were to use mine, the outcome for DRD will look even worse. Here it is :

    AT DEAL ANNOUNCEMENT :
    DRD MCAP = R2,14Bn
    2P = 2,99Moz for 431M shares
    Therefore , gold eq/share = 0,69oz/share for R4,96/share
    By inferring SGL’s now 38% ( which can be 50,1% over a 24months period at a discount of 10% on 30 day vwap) , we get the following :
    Share Count = 431 + 265 = 696M shares
    2P = 2,99 +2,75 (SGL contribution) = 5,74Moz

    Thus gold eq /share( post deal) = 0,0082oz/share for <<<< R4,96/share
    For estimate CY19 (NOT FY18, 12 months after deal closure) , the same maths apply to production in that attributable to current shareholders (with Ph1 after spending R288M) = 0,62*(±4300kg/yr+ Ph1(±1080kg/yr))= 3335kg (Current attributable = 4300kg/yr). The same Maths also applies to Cash Flows! And everything else thereafter , apart from shareholders' wifes ( those remain unaffected by the transaction!)

    SO THE PRE-DEAL SHAREHOLDERS WILL FEEL HARD-DONE BECAUSE NOW THEIR SHARES ARE WORTH 0,0082oz/share instead of 0,69/oz. Furthermore, the other shareholder (SGL) can buy more shares by sticking it to them by a further R338M dilution ( ±R50M (shares dilution) PLUS R288M (Obligatory Capex spend)) in 24 months. Therefore, for them having to share their H1FY18 FCF = ±R60M with SGL will just add to their misery!

    I use the 2P reserves because the remining of the gold is the source of cash flows!

    I hope the above helps the DRDGold CEO to understand the angst of his shareholders.

    If not, he must just remember the following:
    "Its a WIN-WIN transaction, with SGL WINNING MORE THAN DRD"

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