[miningmx.com] — THE proposed $230m sale of DRDGOLD’s international assets to Australia’s Emperor Mines recognises that the firm’s South African gold mines, one of them more than a century old, are finally meeting their natural end. That’s not quantum physics, but it’s worth dwelling on the gamble DRDGOLD is taking since its market appeal has long been based on the leverage of its South African assets to the gold price.
Consider, how through years of loss-making and corporate wrangling, DRDGOLD always headed the leader board whenever the gold price demonstrated upward activity. Among the US’s share retail market particularly, DRDGOLD was representative of everything magically transforming about owning gold. Old workings, deep in South African earth, sported the prospect of becoming richly endowed profit-makers, an illusion of wealth triggered by the possibility of a steeply ascending gold price.
Now, the gold price is running.
Wellesley-Wood, speaking on South African radio (Classic Business), said the gold market was “in a sweet spot that would last four more years’. He may be right. So why now replace DRDGOLD’s exposure to market oscillations with what appears to be the quite different proposition of an emerging market exploration play?
That’s what will happen if Emperor Mines successfully sets about growing its Australasian ounces and DRDGOLD Africa hits pay dirt. The influence of the South African mines will be diluted. Eventually, you could shut them and no-one would notice.
The gambit is two-pronged, and well-considered. Firstly, it appears DRDGOLD is betting the gold supply deficit will create an urgent market need for a nimble-footed, mid-sized gold exploration company. Already, the assets DRDGOLD is selling to Emperor Mines is creating a firm with 2 million oz of reserves and 7.6 million of resources.
Secondly, that consolidation among the top tier gold producers, as evidenced by the $9.2bn proposal to marry Barrick Gold with Placer Dome, will create more opportunity for DRDGOLD to buy assets the behemoths won’t and can’t bother developing.
“There are 29 new gold mines in the pipeline right now and even if all these are developed, it would require a further seven projects every year to make up the deficit, ” Wellesley-Wood wrote in a DRDGOLD investor note earlier this week.
“The reality is that not all these 29 mines will get the go-ahead as cost inflation, especially capital cost inflation for resources projects, has increased by a great deal more than the gold price. So where are the ounces going to come from?’ he said. The world is gasping for gold ounces and the new DRDGOLD wants to help plug the spaces.
It’s an intriguing concept and perhaps not too different from DRDGOLD’s gold price leverage of the past after all. But instead of leverage to known ounces in South Africa – the Roodepoort Rocket – DRDGOLD is trading on its leverage to unknown prospects in Papua New Guinea and even more distantly, Africa.
That’s the theory. The practice may prove more challenging. Tolukuma, Vatukoula, Porgera are a variable mix of assets. And there’s no knowing how prospective the exploration tenements attached to these properties may be. But expect a renewed flurry of paper-based corporate dealings as Emperor Mines sets about building itself.
DRDGOLD is renowned for issuing paper. Simon Kendall, an analyst for UBS in Johannesburg, told Business Report in August 2004 that DRDGOLD had issued its shares 100 times over 10 years. The company started with 2.5 million shares. Not all of the shares issues were done very profitably.
“We intend to play in the theatre of Australasian consolidation,’ said Wellesley-Wood, and this time using more highly rated Australian paper of Emperor Mines rather than the scrip of its parent. Already, the company has bought a 5% stake in Allied Gold, a relatively unknown Australian junior, with an option to increase its stake further. “We intend to take other juniors under our wing,’ says Wellesley-Wood.
The Australian market loved the deal. Emperor gained 21.5% after the announcement that Emperor Mines was to suddenly to become a 375,000 oz/year gold producer. If it can consolidate itself, DRDGOLD will even set about taking its story to Canada. First a pipedream, and spoken about fulsomely, Wellesley-Wood won’t now be drawn on the matter, probably because he considers it more likely.