Earnings Call Transcript - DRD Q4 2022

Niel Pretorius, CEO

Good morning, everyone, and thank you very much for joining myself, Riaan and Jaco for our results presentation for the financial year ending June 30, 2023. Before we start, I think this is somebody who needs to go on mute. Thank you. Before we start, I think maybe just a moment to remember Derek Watts, who passed away yesterday. I think we all remember Derek as a fearless journalist with integrity, relentless pursuit of the truth. And I think he leaves a gap in the media community. Moving on to the first page. That is our disclaimer. We are keeping the content of this presentation fairly light. We're not going to go into a lot of detail; really just the highlights and the events that impacted and contributed to our financial operating performance this year. We'll obviously deal with everything more extensively in our integrated report. Just in terms of highlights, the key group features for this year show that on the back of a very good gold price, our revenue is up 7% for the year, and that also contributed to an 8% increase in operating profit of just over ZAR1.8 billion. That in turn contributed to a very nice increase in headline earnings, a 14% increase to just over ZAR1.2 billion, and that has enabled us to pay a 16th consecutive dividend. We're topping up the interim dividend by another ZAR0.65 to take the total dividend for the year to ZAR0.85. And I remind myself that being a shareholder, a very large percentage of the shares that I purchased and which are now earning dividends I bought for just over ZAR2, I think ZAR2, 13 months. It's been a long-term strategy on my part, and I'm hoping that some of the shareholders are finding themselves in a similar position. Moving into the operating trends, we'll deal with both operating segments individually and then with the group operating features. What we want to emphasize here is that the graph is showing two things really. The first being volumes coming under pressure, especially towards the second half of the financial year, but offset to an extent by an increase in yield. Every year, we do anticipate certain things from happening, and we factor that into our thinking as part of what we provide for in terms of contingencies. There were one or two additional ones this year in terms of the volume throughput that we were unable to respond to the way that we would have preferred, involving delays on a number of new sites. You would have seen in the letter released this morning that we consider this year to be an in-between year with some of the earlier sites coming to an end, particularly the Elsburg site, reaching the end of its producing life and needing to be replaced. We have a program of sequencing our reclamation sites, and there were a number of delays in actually implementing that. The replacement site at the right trial site, which is the main volume site, has only come online recently and is only now starting to reach a steady state. A lot of the throughput this year was supplemented with material from what we call cleanup sites—a program started a few years back to clean up some of the legacy sites. There's a fairly large fleet of machines lifting and stockpiling material from these areas, and this was activated, helping with recoveries. The head grade from these areas is typically higher, leading to an increase in yield of 0.25 grams per ton compared to where it was in the past. You could see the impact both on the Ergo production output as well; the production throughput dropped from just over 2 tonnes per half year to just under 2 tonnes per half year. These circuits are sensitive to both volume and grade—higher grade helps. Moving on to Far West Gold operating trends. You would have seen in the letter that towards the end of the year, there was a delay in commissioning the new site, the number 3 dam. The first slide, number 5 dam, is just a few steps away from the Far West Gold Plant. The number 3 dam has now come online, but that too has its challenges with commissioning on time, mostly due to the delay in delivery of components that had to be imported, a logistical issue we attribute to the global economy not fully recovering from the COVID pandemic-associated lockdown. Far West Gold was also impacted by the load curtailment arrangement we have with Eskom, affecting production numbers, the yield, and the overall production. We had to switch off two mills to grind down the course material. You lose the benefit when you switch off the mill. On a group basis, there was a steep decline, but thankfully, it's only temporary. Production is expected to pick back up now that the number 3 dam is operational. You will see improvements as these systems come online, balancing out the lower grade materials being processed. Total production for the two half-years or for the financial year was just under 3 tonnes for the first half and 2.5 tonnes for the second, leading us to just below 6 tonnes for the year, where we want to be—somewhere between 5.5 tonnes and 6 tonnes—which gives us the scale to support the overhead structure of the business. Now I’ll hand you over to Riaan for the financial review. Riaan, thank you.

Riaan Davel, CFO

Thank you very much, Niel. Good morning, everyone, on my side. As always, it’s a privilege for me to take you through the financial results, supported by the operating context that Niel has provided. Before I dive in, I want to say two words of thanks: firstly to our operational team for delivering these results. We all know we operate 24 hours a day. In a sports analogy, we can’t take our eyes off the ball; the ball is always in play. I want to recognize the operational team that produces these results. Secondly, I want to thank our reporting team. We summarize complex material simply in these presentations, but it requires lots of effort and dedication. I want to thank them for their support in preparing the financial results, which I am very proud to present. Now, to the financial review side, as Niel mentioned, ERGO’s revenue overall for the year increased by 11%, driven by a 16% increase in the average rand gold price received, although gold sold was down 5% due to lower tonnage from difficult operational conditions. Looking at the first six months of FY 2023 compared to the second six months, we saw a steep increase in the gold price. The second half saw a 17% increase in gold price, although gold sold in that period was down 7%. Overall, it was a good revenue performance. From a cash operating cost perspective, the overall increase was only 6% year-on-year, even with a lower tonnage environment where volumes were down 22%, but yield increased overall by 21%, offsetting. Yes, cost pressures are very much there; there's a note in the booklet about reagents, diesel, electricity security. These increases have been above inflationary levels. But we delivered a very good six months, and there was an overall 26% increase in operating profit for ERGO year-on-year, which is an excellent result at just over ZAR920 million gross contribution. Moving on to the Far West, a slightly different picture. As Niel mentioned, not many sites are operational, and Driefontein 5 contributed less due to low grades and similar challenges we faced. On a year-on-year basis, Far West saw revenue decline by 2%, with gold sold down by 15%. However, this was offset by a 16% increase in the average gold price received. Operating costs were up 11% year-on-year, reflecting cost pressures similar to ERGO. Consequently, operating profit was down 6% year-on-year, contributing just below ZAR900 million to the group’s operating profit, which I still classify as an excellent result. Overall, group operating margin percentage was assisted by the gold price, increasing to 36.1%, the highest we've seen over the past four half-years. All-in sustaining cost margin was healthy at 24% despite ZAR476 million in sustaining capital expenditure, aligning with last year. Even with this investment, the healthy margins indicate a robust performance. Transitioning to free cash flow, yes, the year-on-year decrease is apparent, but cash generated from operations was up year-on-year. The free cash flow reflects ZAR550 million in capital spend on growth, indicating a positive growth story. In total, we spent over ZAR1.1 billion on investing activities, which is almost 90% more than last year. A very positive cash position is evident, and headline earnings per share saw a 13% increase to ZAR148.2. I will touch on the profit and loss briefly. Revenue increased by 7% due to the gold price increase, which was a 16% year-on-year rise, offset by gold sold down by 8%. Cost of sales was up by 5%, primarily influenced by depreciation with lower tonnages. Overall gross profit from operating activities was up by 15% year-on-year at just under ZAR1.6 billion. Net income rose 14% year-on-year to ZAR1.281 billion, reflecting a strong performance. This positive trend is supported by robust financial management, strategic investments in property, plant, and equipment, and a healthy increase in equity year-on-year, even after the dividend payout. To summarize, we're positioned well in the current environment and prepared to deal with the ongoing challenges while also benefiting from the strategic advantages our operations present.

Niel Pretorius, CEO

Thanks, Riaan. Yes, it has been a good period for us in terms of share price performance. The share price is tracking the gold price, with DRD gaining 58% year-to-date. Historical performance highlights that over ten years, DRD gained 794%. Long-term performance and sustainability are key focuses for our strategy. Moving on to sustainable development, we have reduced potable water usage significantly by relying more on industrial and recycled water. We saw a 10% decrease this year compared to 10-15 years ago, now around 90%. In terms of our energy strategy, we plan to add 20 megawatts of solar power soon and aim for an additional 40 megawatts in the next 18 months. This aligns with our commitment to reducing reliance on the national grid and supports our sustainability goals. We are continuously exploring opportunities for responsible energy investments and will provide further updates on our progress. Our operational and community initiatives are aligned to ensure stability and development. Looking forward, we are cautiously optimistic about the economic and social landscapes. As we manage our resources wisely, we will keep engaging with communities to support sustainable outcomes.

Riaan Davel, CFO

Thank you for the opportunity to clarify. We focus on optimizing our usage of water from various sources by investing in infrastructure to improve efficiency. We utilize treated water from TCTA and rainwater catchment before considering potable water, ensuring we maximize resources efficiently. All resources treated are within regulatory exposure limits, and we continue to prioritize sustainability. Regarding grades, moving operations from Driefontein 5 to Driefontein 3 will provide better yield potential, and we aim to incorporate additional lower-grade resources while maintaining cost efficiencies. We also continue to invest in our reclamation initiatives as part of our ongoing commitment to environmental stewardship.

Niel Pretorius, CEO

Thank you, Riaan. We believe in actively managing our community relations to minimize crime impacts and creating value through strong partnerships. Engagement with local communities is essential, particularly regarding issues of public security and environmental well-being. We have observed improvements in stability where we actively engage, and our investments in community initiatives are meant to empower local economies while enhancing quality of life. As we move forward, we stay focused on resource optimization, environmental sustainability, and fostering positive relationships with stakeholders. We're also in discussions regarding evolving opportunities, including the upcoming PGM tailings project, which is an exciting avenue for our operations and aligns with our growth strategy.

Riaan Davel, CFO

In summary, we are committed to ongoing investments in community engagement and environmental sustainability. The next phases of the solar project and growth plans will see substantial capital investments. We are closely monitoring our operations to ensure they align with both current market conditions and our long-term strategic goals. Maintaining a healthy balance sheet while funding these projects is critical, and we believe we are well-positioned to execute effectively going forward.

Niel Pretorius, CEO

With that, thank you all for your participation. We appreciate the time taken to engage with our presentation today. We'll keep you updated as we progress through this fiscal year. I'll now hand over to Jaco for any final remarks before we conclude.