DRDGOLD Limited (DRD) Q4 2015 Earnings Report, Transcript and Summary

Thank you very much Niel. Good morning, ladies and gentlemen. It’s my privilege to take you through the financial trends for DRDGOLD Limited for the quarter and year ended 30 June 2015. And here is a beautiful picture for our beautiful financial trends. I said it in the April update, when we presented the March results that I love presenting trend lines like that in the operating margin line. And long may it continue, so just as a reminder operating margin percentage, percentage of the operating profit over revenue, at a very healthy 21.9% in quarter four and trending upwards for the last six quarters then. All-in sustaining cost margin, at that level as you know corporate costs are added and then sustaining capital expenditure. So in quarter four, 13.8%, and in there as well, a smaller credit adjustment through profit or loss for the environmental provision much larger one in Q4, 2014, but still Q4 very pleasing on all-in sustaining cost margin, as Niel has mentioned, the operation is not short of capital. So in the quarter, 49% increase in sustaining capital spent to almost R37 million and that’s obviously included in that margin and that helps us to sustain the very good volume throughputs that Niel mentioned for quarter four as well. Earnings before interest, tax, depreciation, and amortization over R100 million for the quarter four, and mainly driven by a very healthy increase in the operating margin. We often rush three things, I really want you to pause and ponder the free cash flow growth. Niel mentioned that as well. It’s a very important measure for us, and we’re extremely proud of what has been achieved around the free cash flows, if you just look at that for the full year 2015, R246 million of free cash flow generated, in the last quarter R88 million, Niel mentioned that includes the sale of the Village Main Reef shares of around R46 million, but it also includes, as I’ve mentioned, the sustaining capital expenditure of almost 37 million spent in quarter four to make sure that our volume throughput is maintained. So still an extremely good quarter and an extremely good free cash flow year for DRDGOLD. Headline earnings per share for the last quarter 0.07 and again driven by very good operating results. Then the financial review and during a quarter-on-quarter analysis, so looking at the June 2015 quarter in comparison mainly to quarter three 2015, so revenue has shown a good increase, 6% in line revenue increase in gold production and sold. And only a marginal increase in the gold price for the quarter of 1%. Net operating cost on that line fairly flat, just a 1% increase overall. And that results in a 26% increase in operating profit to R122.6 million for the quarter. Depreciation slight increase in activity reflected in a slightly high depreciation charge for the quarter. And then the movement in provision for environmental rehabilitation that I mentioned, much smaller credits than the one in quarter four 2014 relating to a reduction in liability for screen oversize material mainly. Then environmental rehabilitation cost spent, a good increase for the quarter to almost R17 million. Other income and costs includes corporate costs and also provision for bonuses for employees as a result of excellent production results. And included in the net finance income or expense line is an accounting principle that says you must reclassify fair value adjustments on the Village Main Reef shares, was helped previously from other comprehensive income into profit or loss, and that results almost 20 million in that line item and that results in a profit before tax of 75 million after tax of 60 million. And I’ve mentioned the headline earnings per share 0.07 and earnings before interest tax depreciation and amortization of R106.6 million for the quarter. If we’re looking at the whole year, a very healthy increase in revenue of 16%, again mainly driven by the increase in gold production and then a slight increase in the average gold price received of 4%, giving us revenues of over R2.1 billion. The net operating cost line 11% increased year-on-year, which resulted in a very healthy operating profit increase of 48% to R384.3 million. Depreciation is must be higher when you compare the two years as a result of the flotation/fine-grind circuit now fully operational, so that will attract more depreciation. And in the movement in provision for rehab that I’ve already mentioned the two credits to the income statement. Stable environmental rehabilitation cost, other income costs just comparing the two years briefly, the 2014 number had quite a big impairment number in relating to Rand Refinery mostly and also to the Village Main Reef says at that point. And the other income and cost for this year also includes as more profit on disposal of some non-core assets of R15 million. I’ve already mentioned why that looks strange in relation to the prior year, because it includes the Village Main Reef fair value release as a comprehensive income, as a credit into the statement of profit or loss. And that leaves us with R96.8 million profit before tax for the year and made profit of 68.2 million which results in a headline earnings per share of 0.10 and earnings before interest and tax ranging to almost 300 million, but mainly driven by the growth in operating profit of 48% which is very easy. Statement of financial position. Property, plant and equipment of almost R1.7 billion, some capital additions in there and depreciation, but no major movements. The non-current investments and other assets, we just compare that to the previous quarter, that shows the disposal of the Village Main Reef shares that happened in quarter four. Environmental rehabilitation trust funds and investments, again all invested in cash-related products of 188 million. And together with guarantees, our rehabilitation liabilities are currently fully funded. Cash and cash equivalents, again Niel mentioned and again I will emphasize, if you get the question tonight or back at the office from colleagues, or tonight, friends, family, loved ones mention that very healthy 55% increase in cash and cash equivalents generated. At the current assets of just comparing quarter-on-quarter, it's about a 30 million increase in gold in process between the two quarters in that other current asset number. Long-term liabilities, no external debt. So there's some finance lease obligation about 19 million in there, and other small employee benefit obligations of about 9 million, but no external debt. Niel mentioned the payments during the financial year, the last payment of almost 23 million on the DMTN notes also occurred July 3, 2015. Provision for environmental rehabilitation, slight increase year-on-year. Current liabilities, that includes the 23 million that I’ve just mentioned that was settled on July 3 for the notes. And that leaves DRDGOLD with a very, very stable current ratio of 2. I'm going to hand back to Niel now. Thanks. Niël Pretorius: Thank you, Riaan. I think I may or may not have mentioned that, as a Board and a management team, we've decided on the notion or the concept of sustainable development as our key strategic driver. It is the golden thread that determines the strategic allocation of resources and capital and to everything that we do. And we want to see alignment and overlap between value creation in respect of all five capitals. Social capital is an important part of that. Mostly poor people live amongst the mine dumps that we are mining, and we’re trying to improve their lives by investing in the longer-term future. So we’re maintaining this initiative of offering math and science to matriculants coming out of those communities. The results are already impressive. We're very pleased with what we see. The learners with an average 30 at suddenly start getting 60 and 70 and 84. And this is proper math. This is not arithmetic. This is not sum; this is all this other stuff that I don't understand, like trig and algebra and so forth, stuff that you don't need to know if you're a lawyer. We're also extending this to accountancy. So we've got a full-time accountancy teacher also working for us. So hopefully, some of those scholars can take advantage of that as well. EBDA is still going along nicely and offering these other courses to community members and I think we got 100% pass rate, if I’m not mistaken on the national certificate. If not then, it’s close to 99.9, Riaan is that correct.

Yes. Niël Pretorius: EBDA which is a R55 million venture over the last few years is now going to be placed into a community trust. The beneficiaries of this trust have been identified as seven schools in the surrounding areas. So whatever upside they generate, and they are all making money now that will go into the further enhancement of the educational environment of these learners in those schools. And we’ve approached a number of independent individuals, prominent individuals to assist us in the handover of the trust itself and making sure that they stay on the true and the narrow. We’ve also invested a bit of money in administer of capacity for one of the schools. And I think there have been a number of computer enhancements and computer infrastructure, nutrition of kitchens et cetera, et cetera. So education of the youth is very much a focus of our social value, external social value that we want to create. And I have very strong views on this and making sure that that is adequately resourced and that is adequately funded. Local economic development, which is part of the social and labor plan, there we've now embarked on the follow-on from EBDA. As I said, EBDA was a just over R15 million investment over five years that is now self-sustainable. And these are two new projects, an agricultural livelihood project. I think ultimately what we would want to see is that some of these projects become increasingly vertically integrated, that you don't only produce but you also source and ultimately also market and maybe also do a bit of value-add. And then the sewing project, that is something that I think can also grow a pair of healthy legs in the expansion of the product range that they will start looking at into industrial clothing and becoming a real venture. On the environmental value-add, I think it's very important, if you want to run a business in the middle of Johannesburg of this nature, that you do spend what needs to be spent on this. It's something that the media unfortunately don't always get right. We've had a bloke in London writing about dust issues in Johannesburg, and I just don't find that particularly intelligent, especially looking at some of the comments that are made. You really want to walk these dumps and see what's happening there, what's the amount of money that's been spent, how it's being spent and what the effect is on dust emissions, on the readings, et cetera, et cetera. We've reduced that significantly. And I think there are some lovely trends that we can show those who are interested just to show how those dust emissions have come down over the last few years. We want to halve them every year, and we're actually quite easily achieving that. And I think by 2020 is the target to have them fully vegetated. But do yourself a favor, go and drive around Soccer City, some of the walls of those tailings dams that have been fully vegetated. I think it's a truly impressive feat that our operational team have managed to achieve in the last few years. So you'll also see some work happening on the northern slope of the GMTS tailings dam. That's a big one, right behind the Soccer City, where it's being sloped for and prepared for vegetation. I think we're getting close to a stage now where virtually all of those side walls are going to be fully vegetated. The tops have been vegetated for quite some time now. On the environmental value – capital value-add South Africa is a dry country and you do have to plan for water scarcity. We've had a number of very wet years with no real issues on – as to water. But I don't think it's sustainable to be competing with society for potable water. So this is Rondebult water plant, which took R20 million to build, that's a lovely little piece of infrastructure. It's about 8 mega-liters a day at its capacity. And as long as people flush, we'll have access to this water. And it's ideal for our purpose. And we want to do more of these. There are some water sewage forms that we’re going to be talking to and doing some of this. Of course the TCTA initiative is also alive and well. There we have access to just on 30 million liters of waters per day. We're not taking advantage of that because of the high amount of lime that we've got to introduce into the water to get the pH to where it needs to be for purposes of our operations, but it's accessible. We can access it and it's – the science exists for us to also have this ready for what we need it for. So on the looking-ahead side, 2015 was certainly a very challenging year. I think we wanted to prove to ourselves that we have a good business, that our science and engineering are proven, that our technology is proven, that it can achieve what we set out to achieve, that the money that we spent was worth spending on the stuff that we spent it on. And I must congratulate our management team. I think they came through with flying colors because we're achieving the outcome, insofar as the drop in tailings grade is concerned, on exactly the number. And you, who have been following these presentations for a while now, you'll know that we measure these things into the third and the fourth decimal. We are achieving a reduction in the tailings grade of 0.03, which is exactly what we set out to achieve. And that is how you increase your reserve. That is how you increase the life of mine. That is how, in the longer term, you achieve sustainability. So going forward, we obviously want to make sure that both the high-grade CIL circuit works to the specification on a continuous basis. We want to further optimize it. And we want to make sure that we take full advantage of this additional 300,000 tons per month and volume optionality that we've created and integrating that in the most appropriate manner into our operating composition, that we don't overexploit or underexploit and that we pace it exactly to the most beneficial life of mine for our operations. So that really is the story of 2015. Jaco and Riaan will join me in front here now and we'll be happy to take your questions. Thank you very much. Maybe while they settle in, just a little bit on the dividend. This is our eighth year of paying a dividend. I assume we didn't include that in the highlights. Maybe it's because it's now assumed. Last year's record is this year's standard. So this will be the eighth consecutive dividend that we pay. We didn't distribute all of our cash in terms of dividend. We think that the market is favorable for a buyback. And it's certainly a concept that we're cheering on at this stage to see whether we maybe should be reducing the number of shares that are out there. And our Board is looking at a, what is it, a working capital statement or a solvency and liquidity test that's being done. And we'll be hopefully getting a specific mandate with regards buybacks, provided that the market stays favorable. It's not a given that we will. But if the market stays favorable, there's no reason why we shouldn’t be reducing the number of shares out there. And the earnings and your dividends are going to be slightly higher, or the earnings and your share. All right. Thanks very much. We'll take your questions now.

Hi. It's Leroy from RMB Morgan Stanley. I've got three questions. The one's on the dividend policy. You've always said that you retain a bit of a cash buffer and keep enough free working capital and the rest you pay as a dividend. But given the current stable operations and more predictability, are you considering firming that policy up a little? My second question is could you maybe give us an update on the acquisition of additional reserves in the area? Is that still something that you're pursuing? And then I understand that you've got additional capacity at the plant. But could you just remind us what the tailings capacity is in terms of tonnage per month or per year? And is there scope to increase that? Niël Pretorius: Yes, certainly. Just on the first item of distributing surplus cash, we're distributing less than what we normally would because we do think that the market is favorable for a buyback. So we’ll just be – I think we’ll just be chewing on what's the best way forward over the next six months and see whether we want to distribute more cash either by way of dividend or maybe reducing the number of shares that are out there. We have a mandate from shareholders which is renewed annually to buyback some shares. And I think the expectation is that if the share is undervalued, based not on our opinion but on what the analysts are saying, that we should consider doing that. The buffer that we want to maintain and which we will use for purposes of our planning for the next year, for our next year's budget, does in fact also take into consideration the revolving credit facility that we've got. So we are going to take a slightly more robust view on just how much actual cash we retain. And deposit, we have two international directors in our Board. And they're very concerned that we're holding on to something that is diminishing in value every day. Why do you want to hold on to cash considering that 48% or close to 50% of our shareholders are US-based or foreign? Why do you want to hold on to something that was worth 25% more than what it is now less than 12 months ago. So the board is very conscious of the fact that we shouldn’t be sitting on surplus cash, but you want to deal with it responsibly, obviously. Then insofar as the acquisition of the resources are concerned, we have in fact taken a different view, not a different view, but we took sort of a slight change in direction. We were going to expand quite significantly into the Far West Rand. And we’ve in fact made offers to some of the entities out there and owners out there for resources and subsequently decided to withdraw those offers simply because there is a combination of capital and ultimately also operating costs. And the in-situ grade was such that we felt it was not as healthy as some of the other options in our immediate vicinity. Keep in mind that because we’re now leaving less gold behind in our tail, your head grade that you can feasibly mine, that’s also trickling down, that’s also coming down. And at levels out at a certain level, we know exactly where it's going to flatten out. And increasingly what we're seeing is that a much larger chunk of resources that are nearby are becoming increasingly attractive and could potentially be an option. Few months ago, few weeks ago, few hours ago, the gold price was R440,000 a kilo, and then last week, I think, it turned to R500,000 a kilo, that’s a sort of volatilities that you see. Once we see that the support for the gold price in the longer term north of R500,000 and we don’t really have to go much beyond our garden gate to have a better part of 10 years or 15 years worth of resource that we could introduce into our plant infrastructure. But you want to see, a well established trend before you become that ambitious. And then clearly insofar [ph] as the tailings deposition capacity is concerned, Jaco [ph], you can help me here. If we ran our plant at full capacity at this point in time, in other words, in addition to the existing volume flow, increase it by the R300,000, which the Van Dyk site can offer, we still have enough capacity and the dam can take everything that we throw at it. Obviously you'll be shortening its long-term life if you were to do that on an ongoing basis, but the right next our tailings dam – in fact not right next, part of our tailings dam is a section that had been re-mined by Anglo when they were still the owner of this plant, it’s still a fully licensed site, we’re just looking to see whether the environmental management plan in respect to that site has full compliance of all the rules and regulations that have recently become part of our reality. That’s what – that additional 500 million tonnes capacity, if I'm not mistaken, and that we would want to add on at some point or another, as well. And that is typically something that you would look at, once it becomes apparent that the longer-term resource that we have as opposed to the current reserve, is feasible to mine and that it can carry the cost. But for the foreseeable future, the next five years to eight years, what we've got at our disposal is more than adequate to maintain current run rate, production run rate. Do you want to add to that?

Now look just clearly the numbers, either the plant can do 2.1 million tons. And then night producers [ph] can go up to 300,000 tons giving us 2.4 million tons, which is a capacity going on to the depth [ph] at this point in time. Niël Pretorius: Thanks Davel. Brendan?

It’s Brendan Ryan from Paydirt Media, could you just take us through the rationale go for a share buyback versus pay out the money in dividend, because if I look at share buybacks in mining companies over the last five, six years, in particular BHP Billiton, it’s done nothing for the share price and I’m sure lot of shareholders would rather have the cash and they can decide what to do with that. Thanks

Yes, I think, they are two distinct schools of thought, Brendan. We try not to overcomplicate the decision or the toss-up between do we distribute dividends or do we buy back shares. I think typically what we would do is have a look at the analysis of somebody like Alan, for example. And if we are way off the mark, if we’re way below what the independent voice out there is saying, we should be worth. Then typically we want to buy back some shares and maybe make it more attractive for the longer-term shareholders. If you look at the way that the share performed earlier this year, I think, between the middle of December through to the end of January you saw a surge of close to 64%. And then the short-selling started, on one side, I think, the days-to-cover ratio was something like 5. The short interest was enormous. So if the share is going to be kicked around by gamblers, then we’re not going to just hang out there and say do with us what you want. Then we will start looking off to the interest of the longer-term shareholder, the ones who base their investment decisions on fundamental analysis, because you know how difficult it is to go to the longer-term market, those who actually do a bit analysis of your businesses say that this is something that's worth your while to invest in. And then they get taken apart by the trend trading or by the technical trends out there. So we want to see if we can just may be shrink that pool and yes there would be some sacrifice on liquidity which some might say would be bad. But hey, I mean, why not settle for four or five longer term shareholders that accumulate when the market is favorable as opposed to just getting randomly picked around like a dented coke can. So that’s really where we are at this stage, insofar as that, we’re not just going to go and buyback shares for the sake of it, because we don’t like what’s happening on the market. But at the same time, if the share is, in terms of independent opinion, undervalued, then why not? Why not offer some protection to the longer term market, investment market. Thanks Brendan anybody else?

[Indiscernible]

Once again, thank you so much for attending our presentation, we would appreciate it. Have a good day everyone.