Earnings Call Transcript - DRD Q2 2022

Niël Pretorius, CEO

Good morning, everybody. And thank you very much for joining us for our Results Presentation for the year ended 30th June 2022. I am Niël Pretorius and joining me is Riaan Davel, who is our Chief Financial Officer; and Jaco Schoeman, who is the Chief Operating Officer. I would like to provide a little bit of context before we kick off, just in terms of the year. It’s certainly been a year like no other. We are almost at a point where we were the sigh of relief, saying, we made it through another winter. Just in terms of local context. Beginning of the year was deeply unsettling with some of the riots that we saw in KwaZulu-Natal starting to spill over into Gauteng. We also saw how vulnerable we were in terms of just logistics into Gauteng from the coast, with the collapse of Transnet and an over-reliance on ground transportation. Globally, what we are witnessing is more and more uncertainty against the backdrop of the war in Ukraine-Russia, an increase in international tension. We have seen economic uncertainty, inflation running rampant in America for the first time in decades, seeing double-digit inflation and the accompanying increase in interest rates. Closer to home, we have had weather like we have never seen before, the amount of rain that we experienced, especially in the East. It’s just been different from anything we have ever experienced in the past, and we had our hands full in terms of cleaning and separating clean and dirty water, rather. Again, we faced these blackouts, rolling blackouts, with Eskom really battling under the strain of delivering on the energy requirements of the nation. And then, of course, we have the ongoing impacts of COVID that it’s had on our economy, hardship experienced in many of the communities where we operate. We definitely saw an increase in the level of anger and intensity of social discontent. Worryingly, we noticed changes in the patterns of organized crime and violent crime in particular. We definitely observed that crimes that in the past were simply theft have now escalated to armed robbery relating to cable theft, et cetera. All of these dynamics were certainly new challenges that we had to navigate through, seeing the rise of these crime enclaves, where there’s almost a dilution of sovereignty, where the police fear to intervene, which forced us to adopt a very different approach in terms of security and keeping our staff and assets safe. These were some of the challenges that informed our thinking, impacted our costs, and that we are also having to plan for going forward. That is the backdrop against which we are sharing these results with you. Coming out of that and into the new year, needless to say that we are quite pleased with how the year panned out for us, in terms of particularly production and you will see some of the cost trends as well. So getting straight into the highlights for the key features, still a growth in terms of revenue; and in terms of production, things were pretty flat understanding the fact that there was a slight decrease in the gold price. We saw changes coming through against the backdrop I just described to you for costs that were higher on several fronts. Now, those are the typical dynamics that we deal with annually that have become predictable around Eskom price increases in electricity and so forth. But there were also some dynamics particular to this particular year, where we relied more on the mechanical movement of material as a consequence of some of the throughput challenges we faced. Those challenges were related to both the weather and also, in certain instances, the supply of electricity into areas or units where we relied on municipalities and local councils rather than Eskom, which just faced curtailments. So those impacted the bottom line and our costs; thus, you can see that operating profit, while still healthy at R1.7 billion for the year, and headline earnings also very healthy at R1.1 billion, both of those down by just over 20%. We still managed our contribution towards the Fiscus with a total contribution of just over R400 million in terms of income tax and pay as you earn, and we are looking forward to seeing the value delivery that we, as citizens of this country, are entitled to see going forward. We will be pleasantly surprised once that starts happening. And then, of course, this is also the 15th year of paying a dividend and a healthy one of about 6%. It’s a little down from last year, but a healthy dividend, nonetheless, within the context of what’s been happening in the industry and also globally. We see that the percentage of women in mining remains virtually unchanged at 23%. It’s an important number for us, one of our key goals in terms of the transformation of our business. Socio-economic spend, which has become even more important against the backdrop of rising discontent, stands at R52.9 million and I will elaborate more on that during the ESG part of our presentation. There has also been a slight increase in one or two of the areas where we measure dust. As we get to the heart of this, we don’t think it’s more or less due to our own operations. It might be related to the road infrastructure and also some construction areas, but it’s been monitored and looked into. Those are the year's performance highlights in a nutshell. Getting into a bit more detail about operating trends, you can see the narrative surrounding volume throughput, especially in the second half of the year where we recorded 10.7 million tonnes as opposed to the comparative period of close to 12 million tonnes. A lot of that was related to both weather and electricity interruptions that we faced, and a lot of material moved mechanically, which also impacted costs. At least we maintained costs; and I think that’s really where the improvement comes in, demonstrating the essential aspect of achieving throughput. That’s why we report this information on a per ton basis. Production kilos were up on the previous half-year compared to the first half-year, and relatively flat in the first half-year. All in all, looking at where Ergo operates and what it dealt with in terms of getting the volumes through, the plant was stable and that’s really important. Operations were well managed and contained, testifying to a lot of the work done in the past to manage the various contingencies we had to face, the risk factors I referred to earlier, especially those regarding volume throughput, weather conditions, and electricity supply. Moving on to the operating trends at Far West Gold, performance was relatively flat. This is an operation that doesn’t have as many moving parts but is being carefully monitored and has been brought to a level of stability. In terms of volume throughput, you can see it’s very stable. We're running at a capacity that is required for responsible management of our ore body, and also considering the rate we can deposit onto our tailings deposition facility, which is crucial to not stressing our tailings there and hence maintain 3 million tonnes a quarter, overall the half-year, while maintaining production kilos, slightly higher head grades this year. Furthermore, we can take advantage of that by actually pulling the gold out effectively. You will recall this was the first full year that we have benefitted from the copper-producing plant; and for a part of the year, we also had the advantage of additional models which will be further upgraded this year to become close circuit to introduce an even better fraction of material into the CIL tanks for better yield and absorption. In terms of operating trends, on a combined basis, you could see the challenges right at the end of the year, where throughput dropped from 14.4 million tonnes to 13.7 million tonnes, but this was partly offset by slightly higher head grades and improvements in yield, with production remaining relatively flat throughout the four periods we are reporting. Overall, our average performance reflects a strong trajectory. I will now hand over to Riaan, who will take you through the financial review.

Riaan Davel, CFO

Thank you very much, Niël. Good morning, everyone, from my perspective. I want to echo Niël's introduction and discuss the financial results in the context of the various challenges we faced. He mentioned high summer rainfall, load shedding, supply pressures, and cost pressures, and again, this is a testimony to our operational teams at Ergo and Far West Gold, who ensured that the trains kept running amidst those challenges, operating 24 hours a day, seven days a week, 365 days a year. It is always my privilege to present the results of a team that watches every second and keeps a close eye on everything. This is the result of 365 days of hard work, and I want to acknowledge the teams that produced this. In the context that Niël provided regarding tons, yield, and production, Ergo has had a very stable performance, with its resiliency shining through, where maybe a couple of years ago, it faced more sporadic achievements. It’s remarkable when I look at these results; the stability that Ergo has as our flagship operation is commendable. We can say that the first half of 2021 was a remarkable six months for gold production, with the gold price soaring to almost R1 million per kilogram, which shows throughout our results. However, year-on-year, Ergo’s revenue dipped by 6%, with three percent of that attributed to the average rand gold price received and three percent less in gold sold. But overall, we have managed to keep things stable. The cash operating cost that we mentioned also rose by close to 13% year-on-year. However, the operating profit, which factors in some inventory movements is very stable, even in the second six months where lower tonnes impacted the yield, we maintain solid operating profitability for Ergo as well. Moving on to Far West, we saw a marvelous performance. It’s a much simpler operation, and again, this year, our two operations and their diversification provided resilience during challenges, especially around our DP1 operation. Far West showed a year-on-year improvement in gold revenue of 7%, with gold sold up 9% and an 8% increase in yield thanks to the higher head grades at Driefontein 5 Tailing. Yet, we saw similar cost pressures as at Ergo regarding essential consumables, such as diesel, cyanide, and steel, resulting in a 12% year-on-year increase in cash operating costs. Nevertheless, strong revenue performance and an increase in gold sold led to a 3% rise in operating profits at Far West, reflecting effective management of the operations. Let's also look at Group financial trends for this year. Despite a marvelous six-month period characterized by a high gold price, we saw a decline in operating margins of 20% year-on-year due to a 3% decline in gold prices and rising cost pressures. Yet, we managed to maintain stable operating margins overall for the year at 32.6% in the second six months, with managed costs and a slightly higher gold price compared to the first six months contributing positively. Although our all-in sustaining cost margin has declined, I feel confident that we will continue to invest in our business to ensure its resilience. We generated free cash flows of R871.6 million, somewhat lower than the previous year's R1.1 billion, but still a number we closely manage as it is the heartbeat of our business. We remain committed to ensuring value delivery to our communities and government through appropriate tax contributions. Returning capital to shareholders remains paramount, reflected in our final dividend of $0.40, bringing our total dividend for the year to R0.60. I will briefly walk through the statement of profit or loss: revenue is down 3% year-on-year, primarily due to the lower gold price. Cost of sales is up 10%, with some positive inventory fluctuations as we move to our gross profit. Another line item to note is our business interruption insurance claim's contribution to our other income, reflecting a well-managed business with strong governance practices. Our organization has made strategic decisions on share-based payments, which have switched from cash settlements to equity settlements. There’s an uptick in exploration and project costs, which signals our continuance to search for growth opportunities. Finance income remained stable year-on-year, while finance expenses primarily unwound liabilities for decommissioning and restoration. Our income tax, as mentioned by Niël, reflects current and deferred taxes, demonstrating robust bookkeeping. Consequently, the profit for the year displayed a 22% decline year-on-year, but we still accrued more than R1.1 billion, which we take pride in. Moving on to the balance sheet, we see excellent reading. Property, plant, and equipment reflects increased CapEx, with our total assets exceeding $3 billion. Our non-current investments in rehabilitation and other funds encompass over $700 million, showing our commitment to responsible operational practices. Our cash equivalents reached R2.5 billion, with other current assets reflecting a slight rise in inventories year-on-year. As we maintain a healthy current ratio of 4.9%, let me conclude with the cash flow statements, which have shown robust management year-on-year. Our cash flow from operating activities is close to R1.5 billion, indicating our strong position in managing cash flow dynamics. Again, we spent R584.1 million on sustaining capital expenditures, with an increase of 48% year-on-year, which is crucial for our continued operations. I am excited as we continue to grow and seek new opportunities for enhancing our business. With that, I'll hand back to Niël for business updates.

Niël Pretorius, CEO

Thank you, Riaan. Let me continue with the next slide, speaking on our ESG and strategy going forward. As we can see, our share price performance has mirrored the industry's decline over the past year, but appears to be positioned for an interesting buying opportunity right now, despite uncertainties affecting overall market conditions. Let's delve into ESG; it's a measure of sustainable development, and those following our story over the past decade would know that sustainable development is ingrained in our strategic perspective. Nothing we do lasts without considering the impacts we have on various capital stocks that contribute to sustainable development. Consequently, our story is centered around integrated value, which also means that what we do environmentally affects the financial bottom line. A decrease in externally sourced potable water is one of our key risks identified years ago. Hence, we aim to reduce potable water usage by at least 10% annually, a target we've managed consistently. Last year, potable water consumption increased due to the addition of water facilities, but overall, we kept our water resources in a closed circuit, using greywater and recycling extensively. Rehabilitation spending is a pivotal aspect of our budget and operations, helping repair damage from mining and restore landscapes effectively. In terms of dust emissions, contrary to previous conditions, we have made significant strides in addressing dust management through vegetation efforts. We invite scrutiny of our tailings storage facilities against others in the industry, as we have been setting benchmarks for good governance. The use of advanced technology like InSAR imagery plays a crucial role in monitoring tailing movements for proactive management actions. Our environmental contributions are significant, with the containment of tailings being managed responsibly, ensuring minimal impact on the environment. Our focus on socio-economic development has seen a dedicated R53 million spent this year to enhance the quality of life in surrounding communities. The well-being of our workforce remains paramount; hence, our desire is to create emotionally and physically safe working environments, particularly focused on addressing gender-based violence. Our community involvement aims not just to improve lives while we are operational but to empower self-sustaining communities. Our initiatives are achieving traction across multiple sectors including health care where we are focused on mental health support for our employees, which is especially critical after the challenges posed by COVID. Moving forward, our goal is to remain committed to social stability, working hand-in-hand with communities to foster prosperous environments beyond our operations. We aren't just increasing our physical boundaries but enhancing the relationships we build. Future initiatives hinge on collaborations with various stakeholder groups to strengthen our collective resilience, which can combat the challenges we face. As I draw to a close, I emphasize how important it is we recognize South Africa's potential, viewing challenges through a lens of opportunity. We are committed to investing in our operations and growing our contributions, and we remain hopeful for the nation's future. That's it from my end, and I will now take your questions.

Operator, Operator

We are now open for questions. Please submit your questions via the chat feature.

Niël Pretorius, CEO

I just want to open the chat feature here, and then I should be able to see the questions. Is it just me or are there no questions? Riaan, it looks like we covered everything.

Riaan Davel, CFO

I just see one. Let me read it from Arnold. Hello, Arnold. Could you please give us a sense of your same business CapEx evolving over the next three years?

Niël Pretorius, CEO

Yes, certainly, Arnold. The key focus areas for same business CapEx for the next few years involve opening new pump stations and new dumps for retreatment. Two of those developments are happening in the next year. That’s the number three dump and the Eastern program, which is on the same trajectory. The same business CapEx will also target improvements in the plants to enhance efficiency. From next year onwards, some major numbers will come through particularly focused on the expansion of the Brakpan tailings dam. We aim to keep our investments aligned with our solar developments to improve our resource management. It's imperative to have a gradual but strategic approach for our long-term that ensures we capture maximum value while meeting operational targets. Are there plans for self-generation of power and a forward scope similar to those at Ergo? In conversation with partners like Sibanye-Stillwater, we explore opportunities for building around existing infrastructure, potentially gaining more from the generated surplus at Ergo by keeping other collaborations in mind. We won't be individually building power generation facilities but focusing on optimizing existing capacities. Nick Dunham has asked for a clearer idea of what’s happening at Ergo and the legal issues at Withok. There isn’t a legal issue in respect of the prospecting parameter in the flood-like dams as far as I know. There is an ongoing claim of common law ownership for which we believe has little ground. However, regarding Withok, to expand its size, we have to apply for a new water usage license since certain portions have not been utilized for a specified period. That process is currently in motion, and we aim to proceed accordingly. Martin is inquiring about the potential for recovering value from dumps internationally in the same way as we are here in South Africa. This really depends on the local infrastructure and market conditions sustaining such operations. We focus primarily on the tailings retreatment locally while maintaining productive dialogue with Sibanye-Stillwater for integrated strategies to leverage our capabilities on their mining operations.

Riaan Davel, CFO

Can you please provide guidance on the effective tax rate for 2023 and how it compares to 2022? Yes, of course, Andy. As you may know, we determine this through the gold tax formula. It's primarily impacted by our CapEx this year. We've decreased the deferred tax rate from 30% to 29% for Far West, thanks to reductions in the corporate income tax rate. With Ergo, we decreased the deferred tax from 25% to 22%. These adjustments reflect ongoing assessments that incorporate various factors, including our updated gold price forecasting and CapEx spending. I hope this gives you the insight you sought.

Niël Pretorius, CEO

Let me summarize, as we have 15 operating sites, we hope to converge towards fewer site operations over the next few years, ensuring efficiency and cost reductions are prioritized. Our approach revolves around high-volume mining from efficient locations while maintaining the highest operating standards. In terms of anticipated capital expenditures for Far West, about R0.25 billion is allocated for the upcoming year; this includes significant investments towards advancing our operations and needed improvements. Just as a final wrap-up, we look forward to continual improvements, and while some uncertainties may arise, we're dedicated to enhancing efficiencies in operations, maintaining our cost controls, and ensuring stakeholder value remains a top priority. Thank you, everyone, for joining us; we appreciate your time and attention, and we will keep you updated on any material changes.

Riaan Davel, CFO

Thanks everyone for joining us today and engaging with our presentation.