De-risking DRDGold - now most production comes from gold tailings
South Africa's fourth largest gold miner, DRDGold, has transformed itself from a high risk producer giving its shareholders a nightmare ride to a much more low risk mid tier operator.
Posted: Tuesday , 14 Sep 2010
The transformation of DRDGold from a miner operating high-cost, and mostly extremely deep, low-grade underground mining operations to a company which now makes most of its revenue from low-risk and far more predictable gold mine tailings retreatment has been quite an achievement over the past few years. Investment wise the company had proved to be one of the worst performers of South Africa's gold miners, but now it appears to be entering a future where revenues and gold production are likely to be consistent for many years to come.
Indeed the volume of old gold mine tailings available to the company is enormous and although tailings retreatment is an extremely low-grade, high throughput, but labour efficient, business, the company reckons its margins are good and future revenues will now be much more predictable than in the past.
In a presentation at Ergo's recently refurbished plant at Brakpan on the East Rand, DRDGold's Charles Symons said that the Ergo plant, which is currently close to achieving its Phase 1 targeted throughput of 1.2 million tonnes per month of gold-bearing tailings - was already producing gold yielding a margin close to US$400/oz. Symons said he was confident that current research and development into improving recovered grade can deliver even better results from Phase 1," Symons said.
The new 600,000tpm capacity pipeline, scheduled for completion in August next year, will link two of the Crown operation's plants - Crown and City Deep - in the west with Ergo in the east. The pipeline will give Crown access to Ergo's 200 million tonne capacity tailings deposition site at Brakpan, enabling Crown to restore its maximum deposition capacity to 600,000t/month from the current 400,000t/m, a restriction imposed in 2008 due to diminished capacity at its Nasrec deposition site.
"Restored deposition capacity means Crown can look seriously to bring to account numerous tailings dams along the western and central Witwatersrand, thus extending its economic life," Symons said.
The pipeline will increase Ergo's potential to recover additional tailings dams along the central and eastern Witwatersrand, providing feed for a second CIL circuit to be developed in terms of Ergo's Phase 2 expansion. Higher volumes at Ergo could be expected to yield further cost reductions and improved efficiencies going forward, Symons said.
Speaking recently in London, DRDGold's CEO, Niel Pretorius, said that the company's focus was mining South Africa's mineral wealth the second time around, and the resource in the tailings is enormous, but requires ultra high throughput, high capacity plants to process this material which runs at a headgrade of only between 0.3 and 0.4 g/tonne. He reckoned there were 800 million tonnes of tailings processable at Crown, the world's biggest tailings retreatment plant, giving it a 25-year life and possibly more may come available now that the Crown and Ergo plants are being linked. He put margins at Crown as 28% and at Ergo 32%.
DRDGold is South Africa's fourth largest gold miner, after AngloGold, Gold Fields and Harmony, and ranks as a mid-tier producer in its own right with annual production of around 250,000 ounces a year from its tailings plants and the Blyvooruitzicht (Beautiful Outlook) gold mine on the West Wits Line - now referred to mostly as just Blyvoor.
The company controls resources of around 56 million gold ounces, but the largest part of these (30 million ounces) lis ocked up in the old and very deep ERPM mine where mining was suspended in October 2008 and the property allowed to flood. One senses there is not much management enthusiasm put towards trying to resurrect this operation which had taken huge amounts of management time and effort and still could not be made to work profitably, but a yet higher gold price could prompt a revival. The second biggest resource is at Blyvoor, the company's remaining underground mining operation. Blyvoor was at one time South Africa's richest gold mine and still has some good potential which, if current development and working goes to plan could yet give a great boost to the company's earnings at current gold prices - DRDGold is unhedged.
Blyvoor is still, though, the biggest risk element in DRDGold going forward, although as the company is held via a subsidiary corporation Pretorius reckons any downside risk is more easily containable.
The resource held in the tailings projects is only around 7 million ounces - a volume which many gold mining companies would give their eye teeth for and which could sustain a 25 year life and more producing 250,000 ounces of gold a year - not a bad prospect considering its low risk assuming the gold price remains at reasonably high levels.
DRDGold's ordinary shares are currently listed on the Johannesburg Stock Exchange and on the Nasdaq Capital Market in the form of American Depositary Receipts (ADRs). The company's shares are also traded on the Marché Libre in Paris, the Regulated Unofficial Market on the Frankfurt Stock Exchange, the Berlin and Stuttgart OTC markets, as well as on the Euronext Brussels, in the form of International Depositary Receipts.
As an extremely low grade producer, DRDGold is particularly sensitive to fluctuations in the gold price. Should gold prices continue to move upwards, the margins should increase comfortably as the company, with most of its production from its tailings retreatment is much better able to resist the cost increases which fall particularly hard on the labour intensive underground miners.