Pretorius defends hedge as survival strategy for DRDGold amid capex spend

Niel Pretorius, CEO, DRDGold

DRDGOLD CEO, Niël Pretorius, has defended his company’s decision to hedge about a third of company gold production this year, saying that it’s necessary in order to preserve the firm’s long-term commitment to 100% spot gold price exposure.

“In order to continue to offer this proposition [of spot gold price exposure] we have to stay in business,” he said of the potentially tricky period the company was entering in which it will draw down on a R300m revolving credit facility in order to pay for the development of the first phase of its Far West Gold Recoveries (FWGR) development.

“By May, we should have established revenues from FWGR. This is not margin protection, but in order to pay interest should we draw down on the debt. We don’t want a two to three month period where we are vulnerable. Remember that interest payments are due when interest payments are due,” he said.

DRDGold announced on September 5 that it 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.

Pretorius was responding to investor and analyst questions about whether the group had abandoned its long-standing investment offering of leverage to the rand gold and dollar gold price. The last time DRDGold hedged was more than 15 years ago.

“About 90% of the attractiveness of the company is that we are unhedged,” Pretorius acknowledged of the firm’s investment proposition. “And we are probably being a bit conservative. But at the same time we don’t know if the gold price will go down. The international flavour at the moment is dollar gold [price] is less on the attractive side.

“This is a four to five month project where we will spend the bulk of capital quickly. It will be a high capital outflow without the income. But we don’t have a hedging strategy, we have a management strategy,” he said.

FWGR are the tailings retreatment assets bought from Sibanye-Stillwater about 10 months ago. The nub of the transaction was that DRDGold swapped 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), 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 Pretorius has said his company foresaw a more conservative approach to development. The second phase might only be undertaken 12 years after the first.