[miningmx.com] — WHAT’S more difficult for a company to handle than paltry cash reserves? An excess of cash.
Well, that’s the theory through which junior gold counter, DRDGold, will have to chart a practical course in the coming months and years. According to sources, the once ailing Blyvoor, an underground mine producing gold since the Seventies, produced R30m in cash after capex in October! This for a mine that nearly went bankrupt less than six months ago.
This is also the mine DRDGold is selling to Village Main, a company over which Bernard Swanepoel now holds the reins. “He’s ruthless,’ says Niel Pretorius, DRDGold CEO, of his counterpart. “He’s the maverick. The right person to run that mine,’ he adds of Swanepoel’s swashbuckling approach to cost-cutting. In return, DRDGold has 9% of Village Main but there’s no chance of anything developing further in that relationship.
Yet should the parties fail to consummate the deal, there’s a couple of second choice transactions that are waiting in the wings. Interestingly, some of them were cash-based – one is a reverse takeover of DRDGold – but Pretorius didn’t opt for them, partly as cash is not really what DRDGold is short of right now as it’s making so much of its own.
In the September quarter just reported to the market, the company made more cash than in the whole of the previous financial year. Miningmx can report that in the last month, however, DRDGold made more cash than in the last quarter. That’s what you call exponential growth. But what to do with it, especially when you consider DRDGold only needs R200m in buffer post capex.
“We won’t pay a fancy dividend just to impress the market,’ says Pretorius. But he will be paying an increased one, that’s for sure. The question is, how much?
Analysts are fond of calling for special dividends, particularly when they’ve got a buy on the stock and a target price to meet. They have a point considering DRDGold was once cash flush before following the sale of its Emperor Gold shares a couple of years ago, all of which evaporated for no apparent gain. DRDGold even faced the risk of dropping off the New York Stock Exchange where its ADRs, paper representing a share, are registered because it’s market capitalisation was falling below the necessary $1 threshold.
DRDGold is now trading at over $6/share with Pretorius talking about looking to “horizontal’ growth. This is a strategy to find more gold dumps that it can reprocess, extracting gold the old timers didn’t have the recovery exactitude to mine. That’s now DRDGold’s business, and the thinking is that if the company has the technology to remine gold dumps, it could do it with other minerals, like uranium for instance.
So Pretorius is wondering whether DRDGold is a technology company rather than a gold miner.
It makes sense to play where it’s strong. Talk that DRDGold is looking at gold exploration in Zimbabwe and now Mozambique is just fluffy talk, or “putting out feelers’ as Pretorius describes it. DRDGold’s real challenge is to build margin for when the forces that have propelled it to its current share price heights – the weaker rand and stronger dollar gold price – turn against it.
– The article first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit www.zinio.com.