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DRDGOLD eyes expansion of metals output in 2019 as it seeks to reduce risks and costs

The South African mIner looking to expand and upgraded facilities in its Far West Gold Recoveries
DRDGOLD mine site
DRDGOLD's Far West Gold Recoveries site in South Africa

DRDGOLD Ltd (NYSE:DRD) (JSE:DRD) is looking to further reduce costs and anticipating the expansion of its operations in the next year while saying it has made significant progress on cutting costs and mitigating risks this year, according to the company's annual report for 2018.

"There is much to look forward to in the coming year and beyond as we develop Far West Gold Recoveries. We will continue to seek out further efficiencies and look for ways to optimise our operations," company Chairman Geoffrey Campbell said in a letter in DRDGold's annual report.

The company is busy upgrading the newly acquired facilities and secured 300 million-rand ($20.64 million) loan to finance the work.

"Our ability to borrow money at a time of dull gold price performance in a sector that is not attracting capital is further demonstration of DRDGOLD’s positive reputation," Campbell added.

He said the company plans to have Phase 1 of the work in place by first quarter of 2019, adding approximately 120 kg of gold a month to the overall production. 

"Phase 2 has the potential to be hugely significant, not just for DRDGOLD, but for South Africa as a whole," he added. "With the right gold price and forward-looking government policies to support a fair and stable business environment to attract the necessary longterm capital, we could be looking at a much larger operation," Campbell concluded.

The South African gold producer and specialist in the recovery of the metal from surface tailings concluded its acquisition of the Far West Gold Recoveries assets from Sibanye-Stillwater on July 31, 2018.

“The improved performance in our share price enabled us to pitch an offer to Sibanye-Stillwater for their West Rand surface gold portfolio at a share exchange ratio that struck a good balance between what we should be paying for the asset, and what they were asking for it," said CEO Niël Pretorius.

The company's report said it will seek to ensure full value is realized from its products by focusing on consistent volumes and managing costs.

DRDGOLD would seek to contain our cash operating costs within budget and below mining inflation, contain the cash operating cost per ton within budget and below mining inflation, achieve stable, predictable volume throughput of  2.1 metric tons per month, and generate positive free cash flow to distribute to our shareholders and invest in other capitals to ensure the sustainable business of DRDGOLD among others.

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

The company said it would try to keep the cash operating costs per ton to 89 rand ($6.10) by achieving the following measures:

  • Total cash operating costs increased by 3%
  • Inflationary increases were offset by the realization of the cost-benefit after the clean-up of the crown legacy sites and specific investments in cost-saving initiatives
  • Volume throughput decreased slightly from 25 metric tons in full-year 2017 to 24.3 metric tons
  • All-in sustaining costs (AISC) margin increased to 5.5% from 3.2% in the prior year

The company generated a positive free cash flow of R93.4 million ($6.42 million) compared to a free cash outflow of R45.1 million ($3.1 million) in 2017, mainly as a result of a good operational performance characterized by a 10% increase in gold production and cost benefits realized.

Price risks could affect earnings

DRDGOLD said in its report that the major risks to revenue and earnings are that both are dependent on the prevailing price of gold.

"Historically, the gold price has fluctuated widely being affected by a number of factors over which the company has no control," the company said.

"DRDGOLD’s profitability may be negatively affected if revenue from gold sales drops below the cost of production for an extended period. As most of the Group’s operating costs are in rand while gold is generally priced in dollars, DRDGOLD’s financial condition could be materially harmed in the future by  an appreciation in the value of the rand."

Recently, a zero-cost collar was entered into to manage the increased liquidity risk as a result of external borrowings, which were secured to fund Far West Gold Recoveries. DRDGOLD has committed 50,000 ounces of gold under a zero-collar with a floor of R565,000 per kg ($38,875) and a ceiling of just under R609,000 per kg ($41,900), spread equally over the next nine months and is cash settled at the end of each month.

DRDGOLD continues to invest in manufactured capital to help manage recoveries and enhance extraction efficiencies and remain resilient in the face of a volatile gold price, it said.

The other costs for the companies include labor, steel, electricity, water, re-agents, fuels, lubricants, and other oil- and petroleum-based products. Many of these consumables are linked to the price of oil and steel and fluctuate accordingly. Also, the majority of the South African labor force is unionized and wage increase demands have, in recent years, "been above the prevailing rates of inflation," the report added.

READ: DRDGOLD reports higher profit and production; upbeat about 2019 prospects

DRDGOLD’s mining operations are also dependent on electrical power supplied by Eskom which has, over the years, imposed tariff increases that have had an adverse effect on DRDGOLD’s operating costs. "The winter tariff imposed by the power utility is particularly onerous," it said.

There is also what the company calls "our social licence to operate (which) refers to the level of acceptance or approval by local communities and stakeholders (including local government) of the Group’s operations and methods of conducting business."

"A social licence to operate is based on the principle that a company needs not only official government permits and licences to conduct its business but also the support of those living and working in its operational jurisdictions. The company may not always be able to control the circumstances that affect its social licence to operate," the report explained.

DRDGOLD, like other mining companies in South Africa, is subject to extensive mining legislation and regulations. In June 2018, the Minister of Mineral Resources published a draft 2018 Mining Charter for public commentary. This revision was intended to address concerns on the previously released draft in June 2017.

Reporting by Rene Pastor, contactable on [email protected]

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