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DRDGOLD Limited: THE INVESTMENT CASE
INVESTMENT OVERVIEW

DRDGOLD glitters with vast reserves in its flagship Ergo and Sibanye-Stillwater West Rand Project

The South African miner’s appeal lies with the gold bull as bullion prices seen moving north
A view of DRDGOLD's flagship Ergo asset in Johannesburg
INVESTMENT OVERVIEW: DRD The Big Picture
The West Rand tailings retreatment project will nearly double the miner’s gold reserves

Johannesburg-based DRDGOLD Ltd’s (NYSE:DRD) century-old pedigree gives it an unmatched cache among South African miners. 

“We are older than Hong Kong,” quipped lawyer turned DRDGOLD CEO Niel Pretorius. “We’ve been around six or seven years before the Wright Brothers had their first flight, so we are from a completely different era.”

Founded in 1895, alongside other mining giants that have come and gone, DRDGOLD is the oldest continuously listed miner on the Johannesburg Stock Exchange. It’s ADRs are listed on the New York Stock Exchange. 

Pretorius is right about the miner stepping out from the shadows of a “completely different era.”

“Initially it was all underground mining, so you can imagine the amount of scarring and environmental impact from the mining in the Johannesburg area. We were just one of many mines,” said Pretorius, who eased into the CEO hot seat, after being the company lawyer for many years.

“One of the things that appeals to me as a modern-day executive is that our business model involves removal of the old legacy sites and cleaning up. You can’t clean up 120 years of legacy in 10 or 15 years, and we have made some mistakes in the past, like selling assets to the wrong people only to see years of rehab neglected, but we are making steady progress.”

From tailings to treasure

DRDGOLD is a highly unusual miner as it literally cleans up the environment by re-treating old mine dumps and opening sterilized land for development. It was one of the first South African companies to jettison traditional mining to focus on extracting gold from tailings, which are the byproducts left over from mining, like ore for example.

Its new technology allows it to recover up to 40% of the gold left in particle form in tailings. DRD Gold extracted 143,457 ounces of gold in the 2016 fiscal year and declared mineral resources of 50.67 million ounces.

When you think of the miner’s business, picture high-pressure hydraulic hoses that slurrify and combine slime and sand, then deliver the mixture through pipelines over vast distances to be processed.

As an investment, DRDGOLD has other key advantages over traditional miners as it faces fewer health, safety, exploration and environmental risks.

It is one of the world's largest producers of gold from tailings, specializing in the retreatment of surface gold tailings around Johannesburg. It’s a rapidly expanding mid-tier unhedged gold producer.

This 120-year-old miner is staying the course by developing and refining its strategy to mine not only profitably, but also optimally ensuring that its business remains sustainable over the long haul.

Riding on the mothership

DRDGOLD’s flagship metallurgical plant, Ergo, some 31 miles east of Johannesburg in Brakpan, and the Knights plant in Germiston, together make up the world’s biggest gold surface tailings retreatment facility.

The miner banks heavily on the recovery of “lower-risk, higher-margin ounces” from its sprawling Ergo plant, which has assets covering an area roughly 38.5 miles east to west and 15.5 miles from north to south.

“In Star Wars, you’ll see the big mothership and then all the other tiny spaceships hovering and darting in and out. Ergo is increasingly playing the role of the Mothership in terms of the infrastructure, intellectual capital, and capacity it channels,” said Pretorius. 

“It’s where you go to dock and because it’s stable and has a straightforward cost profile, Ergo provides opportunities for the likes of the Knights plant, for instance, to focus on their volume high-grade material,” he added.

Ergo gives the South African miner access to nearly 900 million tons of tailings deposited across the western, central and eastern Witwatersrand. Four plants were initially involved in the retreatment of tailings, but Pretorius has cut costs by prudently decommissioning the Crown and City Deep plants and converting them into milling and pump stations.

The new consolidated Ergo plant operation has a 25.2-million-ton annual capacity to process gold-bearing material from a variety of sources delivered through feeder lines.

“The Ergo plant itself has enough material to continue mining for many years long past my life. Since it is well-established it’s always improving its technologies, methodologies, and management practices. It plays an anchor role for us to find opportunities,” said Pretorius.

Higher yield, Pretorius says, is being achieved both from improved performance at the Ergo plant – reflecting further benefits flowing from the plant’s automated monitoring system – and from a more stable flow of material to the plant.

The West Rand Project to fuel reserves

In March this year, DRDGOLD shareholders voted in favor of the miner’s proposed acquisition of gold and platinum miner Sibanye-Stillwater’s West Rand Tailings Retreatment Project (WRTRP).

The miner received the green light from its shareholders to issue 265 million shares to Sibanye-Stillwater in return for its WRTRP assets, resulting in Sibanye holding 38% of DRDGOLD.

The transaction, valued at R1.3bn (roughly US$110mln), also gives Sibanye-Stillwater the option to buy another 12.1% of DRDGOLD shares.

With the WRTP acquisition under its belt, DRDGOLD plans to build a large plant to process a million tons a month, and a tailings storage facility which could act as a catalyst to consolidating more dumps west of Johannesburg.

The West Rand assets currently include a range of gold-bearing dumps near Carletonville west of Johannesburg, as well as three processing plants.

According to analysts, the acquisition transforms DRDGOLD in one stroke giving it a platform from which to grow aggressively into Africa and other commodities. It also cuts overhead unit costs through increased production and puts an end to DRDGOLD’S single asset operating risk.

DRDGOLD wants to bring the high-grade tailings dumps into production by early 2019. The new West Rand crown jewel virtually doubles the miner’s gold reserves, giving it immediate access to facilities that can generate cash for it in a matter of months

Watch: DRD Gold Ltd makes headway on WRTRP acquisition, submits environmental impact assessment

“What makes it so attractive from our perspective is that we don’t have to spend enormous capital to get it up and running. We are buying existing infrastructure that we can adapt to receive tailings material and we can have a new cash flow pretty soon,” said Pretorius.

“There are one or two regulatory steps, but they are almost completed.”

DRDGOLD is waiting on the regulators to issue environmental permits as large water lines crisscross the WRTRP project area.

“We had to put up environmental guarantees for any impact to the environment. They have been put into place so everything that needs to be done for this to go through has been done. Hopefully we are talking about weeks, and not months,” said Pretorius. “The environmental regulators seem happy.”   

Attractive for gold bulls

The West Rand tailings retreatment project will nearly double the miner’s gold reserves from 2.99 million ounces to 5.9 million ounces. That is just one part of the good news for investors.

In more good news, Sibanye’s Driefontein and Kloof mines near Carletonville are relatively rich in gold compared with what it has been mining so far to the east.

“We may get a higher yield based on the amount of gold we produce per ton,” said Pretorius.  

“If done properly, the West Rand tailings retreatment project could deliver 43 tons of gold over the next 15 to 20 years, adding to the 40 tons that would come from the Ergo plant over the same time frame,” he added.

DRDGOLD’s appeal lies with the gold bull. The mid-tier, unhedged gold producer and world leader in surface gold tailings retreatment is an attractive play as bullion prices climb. 

The gold market may be obsessed about the dollar and prospect of a rise in US interest rates. But there’s another factor looming on the horizon: a fall in gold mine supply. After rising every year since 2008 global gold supply plateaued last year, and may have peaked, according to the World Gold Council.

Indeed, the average spot price of gold rose to $1,329 a troy ounce in the three months ended in March, up from $1,219 a troy ounce in the prior-year quarter.

Read: DRDGOLD Limited shareholders give green light to “step-change” WRTRP acquisition

In February, DRDGOLD posted a 27% increase in profit to R$219.9mln and declared an interim dividend of R$0.05 per share for the fiscal year ended December 31, 2017.

“We have been paying out steady dividends for 10 years,” said Pretorius.

Analysts from Nedbank, one of the largest banks in South Africa, wrote in a note to clients that the miner’s operational performance showed “a strong turnaround.” 

“The operational performance showed a strong turnaround with output up 11% on higher yields. This resulted in an 8% drop in unit costs, which saw both headline earnings and cash flows increasing sharply, enabling the company to declare a US$0.05 cents interim dividend,” wrote Nedbank analysts Leon Esterhuizen and Arnold van Graan. 

“The benefits of the ongoing cost reduction and efficiency improvement initiatives further aided unit costs,” noted the analysts.

Not surprisingly, mining shares are catapulted by gold prices, and as finite gold supplies dwindle miners like DRDGOLD will literally be worth their weight in gold. The shares currently trade in a small, but liquid market with a track record of holding value.

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