[miningmx.com] — SUPERB September quarter results from DRDGold have set a bullish tone for the rest of the South African gold sector, underscoring how the soaring rand gold price is transforming profit margins.
DRDGold reported a 28% rise in revenue to R806.2m (June quarter: R630.2m) as total gold production rose 1% to 63,562oz and the average gold price received rose 19% to R395,568/kg.
Operating profit for the quarter nearly doubled to R202.5m (R111m), which is equivalent to 10% of DRD’s current market capitalisation of around R2bn – despite the jump in the share price over the past month from around 300c to 528c.
That translates into headline earnings of 20c a share, meaning DRDGold has earned in the first quarter of this financial year almost equal the 28c for the full 2011 financial year.
DRDGold’s overall operating margin had risen to 25% in the September quarter, from 11% a year previously.
There’s more to come as the gold price has stayed consistently above R400,000/kg since the beginning of October – currently sitting around R430,000/kg – and with CEO Niel Pretorius holding out the prospect of a special dividend following the sale of the group’s Blyvooruitzicht (Blyvoor) mine.
Pretorius said four separate offers had been received for Blyvoor and a decision would be reached on the disposal by December, telling Miningmx that DRDGold’s intention was to sell out of Blyvoor completely.
He said DRDGold intended retaining some exposure to the upside potential of the Blyvoor operation in the event of the gold price continuing to increase. Pretorius wouldn’t be drawn on the specifics but the most likely way this could be done, without keeping an equity stake, is through a cash sale of the mine linked to a royalty agreement with the new owner.
“Our intention is to dispose of Blyvoor in a responsible fashion, given our responsibilities to our workers on the mine as well as our neighbours,” said Pretorius.
“We are not going to just dump the mine and walk away from it. We intend putting it in the hands of a buyer with the right balance sheet and management skills to operate it. We have had four good quality offers for the mine.”
Outside estimates on the price that DRDGold could get for Blyvoor have gone as high as R500m.
JP Morgan Cazenove analyst Steve Shepherd raised the issue of DRDGold paying a special dividend out of the proceeds of the sale of Blyvoor at the company’s results presentation on Thursday.
Shepherd said this would likely improve DRDGold’s investment rating and pointed out the company had retained and spent all the money it had realised from the previous sale of its assets in Papua New Guinea.
“I, personally, would be very much in favour of paying a special dividend out of the Blyvoor proceeds,” replied Pretorius.
“That’s particularly the case given the volatility in the value of the rand. It makes no sense to deny our US shareholders a payout of surplus cash in a situation where the rand is weakening.”
But Pretorius cautioned that DRDGold was operating “during a time of extreme volatility” and had projects on the drawing board to which funds from the sale of Blyvoor could be applied.
The main one was the research and development work underway into improving metallurgical recoveries from the dump material being treated which could increase gold recoveries by up to 25%. A decision was due by the end of the year on this and the scoping study had so far indicated the flotation plant required could cost around R250m.
Pretorius said he was also keen to hold money back so that DRDGold could fund from its own resources the financial rehabilitation guarantees required by government, instead of securing these through insurance companies, describing the charges being levied by insurers as “exploitative”.
Pretorius said DRDGold was now looking at moving into Mozambique in the same way it had gone into Zimbabwe, exploring for greenfields gold projects it could acquire without having to pay premiums for buying out existing operations.
He also highlighted the potential of the medium-depth resources at ERPM extensions 1 and 2 which contained some 18 million oz of gold.
Pretorius said he wanted to achieve some “value recognition” for these assets, looking at a five year horizon, after which he believed South Africa’s risk profile could be a lot more attractive to investors than it seemed at present.
– The writer owns shares in DRDGold.
