DRDGold to hedge third of 2019 output as embarks on expansion

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DRDGOLD today departed from a long-standing commitment not to hedge its gold production in acknowledgement that a transaction with Sibanye-Stillwater unveiled some 10 months ago had introduced more risk into the business.

The company, which extracts gold from mine dumps, would sell forward 50,000 ounces at no less than R565,000 per kilogram and no more than 609,000/kg. The amount is about a third of overall production based on 2018 output of 150,423 oz which represented a 10% year-on-year increase over production in its 2017 financial year.

DRDGold expected to produce between 148,000 to 154,000 oz in the current financial year from existing operations at a cash operating cost of R490,000 per kilogram – higher than the R458,866/kg achieved in the year under review.

The nub of the transaction announced with Sibanye-Stillwater is that it will swap a 38% stake in the business – with an option to extend to 50.01% control – in return for Sibanye-Stillwater’s West Rand Retreatment Project (WRTRP) since renamed Far West Gold Recoveries (FWGR). The tailings are located west of Johannesburg at the surface assets of the Libanon and Driefontein mines.

As manager of the partnership, DRDGold will embark on the development of the assets in two phases. The first phase will include the upgrade of Sibanye-Stillwater’s existing Driefontein 2 and 3 plants in order they process tailings from the high grade Driefontein 5 tailings storage facility. This must be completed in 24 months after deal closure and could see capacity doubled to 600,000 tonnes per month. Commissioning of the facility will take a year. Then there’s a second phase which is much longer dated in execution.

Analysts have suggested that on the basis of Sibanye-Stillwater’s plans for the Libanon and Driefontein tailings capital expenditure could top R4bn, but Niel Pretorius, CEO of DRDGold, has said his company foresaw a more conservative approach to development. The second phase might only be undertaken 12 years after the first, for instance.

However, risk there is.

“DRDGold wishes to reaffirm its long-term strategy to remain an unhedged gold producer and to keep borrowings to a minimum,” it said in notes to its 2018 operating and financial results. “However, the development of the first phase of FWGR will necessitate medium term borrowings that will introduce some liquidity risk to the group,” it added.

“To mitigate this liquidity risk, management traded a zero-cost collar to provide price protection against a possible decrease in the rand gold price while the borrowings will be in place,” it said. DRDGold announced a R300m revolving credit facility with ABSA in order to begin the first phase of FWGR’s development.

DRDGold said it expected first production in the first quarter of the calendar 2019 and that the project would “… materially contribute to our bottomline by the end of the second half of the financial year”.

The recommencement of hedging – DRDGold announced in July 2002 that it had closed out its hedge book – stole the limelight from a very strong operating and financial performance for DRDGold for the 2018 financial year.

In addition to the higher production, which was achieved by dint of improved yields, the company took cash costs significantly down resulting in a 38% improvement in operating profit for the year of R355.2m. This was despite a softer rand gold price for the period. In dollar terms, the all-in sustaining cost increased 3% to $1,258/oz.

8 COMMENTS

  1. The R/kg is now R600 000/kg…..the Hedgebook is R595k/kg – R609k/kg for 50k over 9x months. I say double down and add another 50k for something above R609k/kg.

    This will leave only ±48K unhedged.

    At the AISC = R101/t , the break-even yield is 0,17 g/t, DRD is mining a 0,26 g/t dump for yield grade =0,19g/t. The comfort about dump remining, is that surprises are few & far in between…unless you are First Uranium’s Bufflesfontein slimes dump. So DRD, should be comfortably profitable at these R/kg prices!

      • Dear Madbull,

        This stock is a classic put option on the R/kg gold price.

        I don’t see dividends on the horizon ( for FY19) given the CapEx , and assumed Debt, for their FWGR. This Capex is obligatory given the SGL deal. But at these levels R3,20/sh, i am certainly not a buyer given that there are better gold miners , trading at better multiples ( and better projects ) than SGL’s WRTP that this company is staking its future on. If you are a speculator ( excuse the irony!) , then i guess its worth a punt!

        By now , you should be well aware as to what GS looks for ( my favourite valuation multiples!) in a gold miner!

        Truly Yours,
        GS

  2. History does repeat itself.
    The mining industry barely escaped the disaster which was hedging, 15 years ago.
    It has left deep scars in an industry that for quite some time, had to operate below the breadline as a result of their own doing and frustration within the ranks of investors who were denied further upside.
    Some lessons are never learned.

  3. A put option on the randgold price…..Now thats what I call a real risky strategy. On mine costs are barreling ahead at almost digit annualised inflation (cumulative) as such: rand gold price / kg started at zar80 00 and now sits at zar600 000!!

    • Quite rightly observed.
      Suggesting that hedging is a positive measure without considering the current rate of cost increases is conveniently or perhaps inadvertently, seeing only half the picture.
      This scenario is unlikely to lead to the business being “comfortably profitable”.

      • Dear Concerned Citizen,

        Whats drives DRDGold profitability, thus ( absent any cash calls i.e CapEx) its Cash Flows?

        As a tailings retreatment business, its the Gold Price. The company, has minimal sus-CapEx or ORD CapEx. So i disappointed that they are not be more bold in their hedging this excellent R/kg of R600k/kg for THEM. For the likes of HMY, the R600k/kg is NOT sufficient, it needs >R1Million/kg!

        At R600k/kg , DRD’s EBITDA margin= 20% with a FCF = >R450M on a MCap = R2,3Bn , at production = 150koz/yr ! its also true the hedging has a terrible recent history for Gold Miners. But please , lets not throw-out the baby with the bathwater! THERE IS ABSOLUTELY NO LOGIC TO THE DOGMA( no hedging!) IN MINING!

        To further buttress my point, here is DRD’s AISC , Yield Grade & Gold price for last 5 yrs :
        ____________________FY14______FY15_______FY16_______FY17______FY18
        Gold Price (R/kg)_____R439K____R450k/kg____R546k/kg___R546k/kg___R535k/kg
        Prod ( kg)___________4137______4665_______4462_______4265______4679
        AISC (R/kg) ________R437k/kg___R422k/kg___R499k/kg___R531k/kg__R506k/kg
        CapEx(R’M)________R155M______R87M_______R100M______R111M____R126M
        OCF( R’M)_________R81M ______R284M______R416M_______R52M_____R234M
        From above, herewith is the stupendous business logic behind taking out a R/kg hedge at R595k/kg – R609k/kg even better if its higher…! Look at the big swing in Net OCF from FY16 -FY17 , on a change of R32k/kg related to AISC ( which can be applied to the R/kg gold price!) and a 4% gold production decline. This tailings remining is truly NOT for Investment purposes BUT for speculation. Furthermore, we know that the crown footprint cleaning is now nearing completion, thus saving R70M/yr of CapEx.

        Reason being, even if DRD were to NOT achieve their R490k/kg AISC target, they still maintain a high Margin with 1/3 production which is hedged. I would have been more bolder than 50koz!

        DRD has Cash= R302M , as of June2018.Given the upcoming CapEx (± R300M- R600M by Nov 2019) for mandatory Ph1 of SGL transaction, its prudent to lock-in margins NOW. Remember, in March 2018 the gold price was R500k/kg due to strong R/$ NOT the decline in $/oz price. Certainty of Cash , is vital as they embark on this expansion of production. This is the best decision that i have witnessed out of Niel in a while!

        I am not a fan of Niel Pretorius per se, given that in the nineties he ( advising Mark Welsey-wood) gave away the Buffels & Harties Mines to Simmer & Jack ( Kebbles!) over some silly advise based on American Law NOT applicable to South Africa that somehow going into bankruptcy was going to result in DRD then being absolved of rehab etc costs. So when the Kebbles realised the flaw, they swooped in and picked those assets for a song and made themselves a few millions in the process. The benefit of his Bankruptcy gambit benefited the Kebbles NOT DRD. But in this instance, the business will be “comfortably profitable” with an AISC Margin of R100k/kg for the hedged production!

        So, as a wise man said : As facts change ….I change my mind!

        Truly yours ,
        GS

  4. Apologies Readers. Herewith is a better arrangement:
    To further buttress my point, here is DRD’s AISC & Gold price for last 5 yrs :
    ______________FY14_______FY15________FY16_______FY17______FY18
    AuPrice (R/kg)__R439K____R450k/kg_____R546k/kg___R546k/kg___R535k/kg
    Prod (kg)_______4137______4665_________4462______4265______4679
    AISC (R/kg) ___R437k/kg__R422k/kg____R499k/kg____R531k/kg__R506k/kg
    CapEx(R’M)____R155M______R87M_______R100M______R111M____R126M
    OCF( R’M)______R81M ______R284M______R416M______R52M_____R234M

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