Earnings Call Transcript - DRD Q1 2022

Operator, Operator

The broadcast is now starting. All attendees are in listen-only mode.

Daniel Pretorius, CEO

We're good to go. Good morning, everybody, and thank you for joining us for results for the six months ending 31st of December 2021. Joining me on the Webinar this morning are Riaan Davel, Chief Financial Officer, and Jaco Schoeman, Chief Operations. I'm going to be doing the quarterly presentation as per usual, and then Riaan will take over to talk you through the financials. At the end, we'll also consider your questions. The three of us will be available to answer whatever questions you might have. Moving onto the third slide, it's just the disclaimer. Once again, I think the picture in the background is not coincidental. It's really to give a sense of some of the stuff we'd be doing in terms of our environmental containment. What you are seeing there in that picture is a piece of earth-moving equipment, putting cladding on top of our tailing dam in the area. Of course, it's for vegetation to be established, and you'll see some of those numbers there as well. Please note the three words: mine, enhance, and sustain. It's really an integrated value proposition that we hope to bring to the market, and we are hoping that will also appear in the content of this presentation. Moving on to the first slide, I'm assuming that you've read through the disclaimer. Just dealing very briefly with the highlights for the six months, and we are comparing the six months here with the first half of 2020, which was when COVID had set in. The numbers are quite different between the two, and the tone has maybe also slightly changed compared to what you'll see in the shareholders letter. In the letter to shareholders, I started off by pointing out that we are quite pleased with the way that the business has responded in the second three months. The second quarter of the year, in terms of both volume and extraction efficiency, notwithstanding the fact that we had quite a bit of disruption nationally in terms of electricity supply, and the weather was playing up. It's been a very interesting year in terms of weather. I have the group key features, the highlights. We deal with six months ending December 2020 compared to the six months ending December 2021. The highlights are familiar; it's our revenue, just under R2.5 billion for the six months operating profit, just over R830 million and production about 140,120 tons of gold. That's a good number. It's an easy number to discuss because it refers to the amount of gold produced with reference to tons. It's also easy to illustrate the impact of the movements from gold prices. You'll see that the average gold price for the six months was R863,000 per kilogram compared to R988 in the same period last year. That will be a contributor to the changes in the numbers that you see here. It's very hard to compare these numbers to the six months ending December 2020. Not only did we have a very high gold price for that six months, but it was probably one of the best producing periods that we had in the 12 years that I've been involved in this portfolio. It's important to note that, in interpreting these numbers, it's probably better to take a slightly longer-term view. We need to look at trends and how we've developed over the last few years towards the position where we are now. The nature and quality of the ore body that we have been producing is also important. On the whole, if one were to consider the period ending 2020 has a bit of an outlier, you'll see why we are dissatisfied with the way that the business performed during that period. Head grades are down, but the gold production numbers that came through based on the extraction efficiencies that we managed to achieve are in fact encouraging, and you also see that in the letter to shareholders. I mentioned that we are just over 5,000 ounces over the forecast or the plan that we had for the six months. The income tax contribution was R101 million for the six months, compared to R118 million for the same period last year, and maintaining a sustaining cost margin of approximately 3%. My reference to the six months ending 2020 might sound like a bit of an implication, but the gold price of R863,000 is still very attractive. It enables us to focus on the fact that we produced considerably since last year. That's still enabling us to pay dividends and continue to generate free cash flow of over R400 million. This dividend will be the 15th year in a row that this company has paid a dividend. We're aware of the fact that we own a company focused on cash flows, which is an important measure of efficiency internally and also a vital measure in terms of growth opportunities. Once again, being able to declare an interim dividend is something we treasure. It's an important part of our makeup and who we are. Looking at some of the numbers at the bottom of the screen, our position in mining remains unchanged at 22% of total stock, which is still among the highest in the industry. Our socio-economic development spending continues at just under $20 million, with very interesting developments that I will refer to later on. One of our essential measures in terms of both our environmental dividends and the impact we have on society is the amount of dust coming off our facilities. We've seen a slight decrease in the total number of so-called dust exceedances, which are dust measurements taken over a large area. We think we've managed to stabilize the solids within the regulated threshold or standards that we need to report. Now, moving onto the next slide, the operational trends for the period, I think this will give some color to what I was alluding to earlier in terms of the six months last year being a bit of an outlier. Looking at the volume operating trends at Ergo, we see that volume throughput was on par, slightly lower than the second half of last year, but still higher than the comparable six months in 2020. The yield has improved nicely from the last six months, so we're pleased with the upward trend. This has been due to plant stability and maintained recovery efficiencies. In terms of production, production in kilos per day shows improvement but is slightly down from the first half of '21. Moving onto Far West Gold, it is coming into its own now. We see that the volume throughput is very stable, which results from a single resource or single saturate commission facility. They've been able to maintain throughput through the periods we've affected here with improvements in yield. The initial hiccups in starting the first circuit mall have been resolved. We're also seeing better recognition of the gold delivered to the refinery, yielding a higher percentage recognition or a lower penalty. The copper levels in production are down, a consequence of the copper elution circuit that greatly contributes to these numbers. Production stayed on the increase, reaching 792 kilos over the half-year reviewed. In terms of the grouping, consolidated volumes are slightly down on the second half of '21 but slightly up on the first half of '21. Much of what we report here reflects the recovery yield, which is a function of head grade and plant efficiency. We are focused on ensuring that we do not leave any recoverable gold back in the tunnels. The management teams are as diligent as possible. There are slight production trends showing improvements when comparing the second half of '21, which is an encouraging trend for more normal circumstances. At this point, I'd like to hand over to Riaan, who'll take you through the financial review. Riaan?

Riaan Davel, CFO

Thank you very much, Neil. Good morning, everyone. It's always my privilege to join this reporting platform with Neil. If I may just provide some context before I hit the detail on the financial numbers. As noted at the mine and on the screen, what we're trying to do as a business is to roll back the environmental legacy of mining, primarily starting in South Africa. We aim to look at solutions for responsible environmental management and sustainable development wherever large-scale gold mining has taken place. What does that mean? For me, it greatly refers to mining for as long as we can because that allows us to do more environmental cleanup and improve the lives of people living close to those towns while providing our shareholders exposure to the gold price over a long time. What that means financially is that we do not target the highest-grade sites to extract high-grade yield in a short period to make massive financial returns. Instead, it's about blending and sustainability, which excites me about this business. As noted, we guided capital expenditure of R600 million over the next period, all with the aim of optimizing our premises to reverse the environmental legacy of mining. This is a six-month snapshot of our production, income statements, balance sheet, and cash flows. A significant theme of this six months is that gold prices have relatively decreased. However, as Neil stated, it's still a very good price where it is. The other theme is the cost increases that we've observed. The business is always under scrutiny concerning costs because every cent counts, multiplied by 2.4 million tons per month. As you've seen, we are not alone in this; other companies worldwide are facing supply pressures and cost pressures due to inflation, for example, in the US. Let me discuss some specific numbers in this context. Simplistically, if we compare the period ending 31 December 2020 to the recent period, our gold price is down 13%, from R989,000/kg to R863,000. As a result of the yield we experienced during that period, gold sold is down 9%, which explains the 20% decrease in revenue period-on-period. In the revenue numbers, you can see the gold price very clearly shining through. Cash operating costs increased by 12% period-on-period for Ergo, slightly higher volumes connected to an increase in consumption of reagents with changes in mineralogy of some sites. Overall, we are seeing a decrease in gold price and gold sold, alongside slightly increased costs, had a significant impact on operating profit for Ergo—down by 52%. Moving on to Far West Gold, as Neil described, it operates differently than Ergo. They achieved solid performance throughout the periods, with gold sold period-on-period up by 13%. Hence, the copper elution circuit implementation has assisted its yield. Although we witnessed stable timing and well-managed costs, the more significant quantities at the time helped maintain revenue despite a decreased gold price, showcasing solid results. If we look at the group financial trends, a theme of decreasing gold prices is apparent, diluting the operating margin. Operating metrics also reveal reductions. Sustaining capital expenditure is stable, but I will mention significant upticks coming in the cash flow statement. All of this reflects in the income statement, revealing our headline earnings per share, which is down 48% period-on-period. Earnings represent one of our key focus areas, reflecting on dividends and free cash flow as well as capital expenditure. Revenue is down 16% period-on-period, with the gold price contributing 13% of that decrease, and gold sold decreased by 4%. The cost of sales increased by 8%, slightly lower than our previous indications, spurred by positive movements in input prices. However, the gross profit from operating activities is just over R667 million, down 48% period-on-period. There has been a change in our long-term incentive scheme, transitioning to an equity-settled scheme, which saw a charge reflected in the current year. Corporate and administration expenses have increased period-on-period due to our growth initiatives. Finance income around interest and dividends largely reflects our investment in property, plant, and equipment. Cash and cash equivalents show a stable cash position of just over R2.2 billion, with a significant capital investment plan ahead for the balance of financial year 2022. As earlier mentioned, we are really pleased to declare a 15th consecutive financial year of cash returns to our shareholders. Regarding the income statement and profit and loss statement, revenue is down 16% period-on-period due to gold price changes, declining significantly alongside the gold sold and the cost of sales increasing, but gross profit from operating activities has also taken substantial hit. In summary, our focus on the next steps must evolve around growth strategies, with careful considerations to managing costs through researching and exploring growth opportunities. Expect to see alignment with Sibanye-Stillwater for expanding industrial tracks and potential engagements in innovative partnerships for effective outcomes. Therefore, the strategy and trajectory remain stable amid challenges.

Daniel Pretorius, CEO

Thank you, Riaan. The performance impact relates to the chip price performance and that we are a dividend-paying company that maintains returns of between 3% and 5%. The gold price volatility leads to a realization that revenue lines adjust to costs over time; it's crucial not to sacrifice potential upside. The company aims to preserve and protect revenue while ensuring effective production levels. We strive to keep costs aligned with production and market dynamics. Moving forward, we want to maintain a controlling stake while exploring partnership opportunities that expand into battery metals. We are involved right from the start with projects of joint interest with Sibanye-Stillwater. Direct conversations yield promising avenues for exploration. Importantly, we remain open to several options that may diversify our jurisdiction and products while maintaining growth. Lastly, as operational trends continue to evolve, we understand the complexities in our operations, and the approach toward sustainable operations will bring better clarity as we optimize our targeted mining strategies. Moving on to the Q&A session, I will take the first set of questions. If they are too difficult, I will refer them to Riaan. The first question is from Sandile, regarding providing an update on the green metal strategy, particularly concerning uranium and copper. We will be aligning closely with the Sicany-Stillwater goals, ensuring we believe in collaborations for comprehensive growth, although I can confirm that we are not exclusively targeting uranium at this point due to the high capital expenditure associated with dual product plants.

Riaan Davel, CFO

I confirm what was mentioned—socio-economic aspects are linked to our capital and resource allocations for projects going forward. Likewise, the green initiatives and long-term strategies will undoubtedly increase operational opportunity while simultaneously keeping financials on manageable margins to grow our efficiency.

Daniel Pretorius, CEO

There are many complexities, and we must find stability with multiple operations at Ergo while planning for the future demands and operational costs. This transition to fewer operational sites will indeed help structure costs sustainably.

Riaan Davel, CFO

As we look toward future plans, our guiding principle aligns with aiming for improved cost efficiencies while encouraging robustness and managing potential volatility over time. I expect the all-in sustaining cost for Ergo to experience pressure as we push to maximize efficiency and position ourselves for upcoming operational strategies due in part to significant target allocation across ongoing plans.

Daniel Pretorius, CEO

We have examined various strains and will continue to drive for operations across the colorful future. We have to be dynamic regarding market performances, and I am driven to maintain a robust ground layer economically while balancing scale efficiencies. We’ve seen many questions related to Gold prices and what that delineates for our strategies going forward. In short, our inclination is to keep a close eye on our margins while maintaining steady operational output. Well, thank you, everyone, for joining. If anything material happens, we will announce it, and I would like you to check our website and other resources we provide for deeper insights. Please take care. Good day!

Riaan Davel, CFO

Thank you, Niel. Thanks, everyone.