Earnings Call Transcript - DRD Q2 2024

Niel Pretorius, CEO

There is nothing different about the format this time. We’ll be using very similar information and format as in the past. However, several themes will emerge that we’ll pay additional attention to. These themes include volume throughput, our cost structure for the past 6 months, current and future electricity trends, the social dynamics that are beginning to have an impact and how we are managing them, and a few points regarding the political and regulatory environment in which we operate. Now, let’s dive into the presentation and review the key features for the last 6 months. The gold price has been very favorable, which has positively influenced these results. As a result, we have been able to declare an interim dividend for the 17th consecutive year. This dividend matches last year's half-year dividend of ZAR0.20, based on strong revenues of just under ZAR3 billion, a 12% increase, and an operating profit that rose by 15% to ZAR909 million. While I would have preferred to report around ZAR1 billion instead, that's a figure we are internally reflecting on regarding potential outcomes. Production was down by approximately 7%, and I will provide more details in the segmental analysis. Headline earnings, driven by increases in revenue and operating profit, have grown by 10%. Positive headline earnings make declaring that dividend even more compelling, as it is one of the factors considered when deciding on dividends. We also contributed ZAR127 million to revenue services in terms of pay as you earn. In our detailed analysis, you will find our tax position; we are indeed paying income tax. The all-in sustaining cost margin stands at about 19.4%, partly due to the book price. A key highlight is our ability to benefit from a favorable gold price, which increased by 22%, averaging just under ZAR1.2 million per kilogram this year, compared to the previous year. I have now spent 20 years with DRDGOLD, recalling that when I joined, the gold price was around ZAR60,000 per kilogram. A lot has changed since then, and the gold price is now aligned with various influencing dynamics. Since our operations are primarily in urban areas, the dust from our reclamation and deposition sites is significant. We closely monitor this with over 290 monitoring sites, and the exceedances we recorded amounted to only 0.6% of the total samples taken. Thus, less than 1% of our samples exceeded the dust standard, marking significant improvement. DRD is generating very little dust for surrounding communities, and residents no longer need to wash their curtains twice a month as they did 15 years ago when we started our vegetation programs at the permanent tailings deposition facilities. I will discuss some impacts we faced during the first half of the year regarding operating trends. Observing ERGO’s operating volume trend from the first half of 2023 to the first half of 2024, it is clear that volumes have decreased significantly. This is primarily due to delays in commissioning two large sites that we had planned for last year, which only began operations early this year. Until about October last year, we were sourcing considerable material from various legacy and cleanup sites. We previously mentioned having between 6 and 7 such sites at any time, and we systematically worked to restore these sites before handing them back for future use. When it became evident that delays distorted the timing between depleted sites and new ones meant to come online at ERGO, we had to expedite the cleanup process. The shortfall from the two sites was around 500,000 tons per month, creating a significant gap that needed to be filled with mechanical lifting and transport. The cleanup work originally scheduled for next year and the following is now being accelerated. Fortunately, a lot of ounces in our resource have yet to be mined since they are not part of the current resource; this can occur later when conditions are appropriate. While belt production decreased by 7%, the volume throughput declined by 13%, indicating our reliance on sites that were not part of the life of mine. We have moved past this and are relieved, looking forward to stabilizing the new sites. Our guidance on costs is slightly lower than the unit cost per kilogram for the half year, anticipating a slight softening in impact. Yield was also slightly down due to the transition at the high-volume site. We have seen recovery efficiency improvements from a newly commissioned high shear agitator, which is enhancing recovery rates by adding significant energy into the slurry mix during cyanidation. Production was robust, achieving 663 kilos for the half year, an increase from the previous 6 months. Our operational trends reflect a sharp volume decline between the first halves of the calendar years, with a slight recovery expected as two sites come online at ERGO. The recovery we can achieve is a testament to both the high grades from reclamation sites and effective plant management. In terms of production, we are flat half year-on-half year but down 7% compared to the same period in 2023. Now, I will hand the floor to Riaan for a financial review to discuss the numbers. Thank you.

Riaan Davel, CFO

Thank you very much, Niel. Good morning everyone. As always, it’s my privilege to take you through the financial numbers, just to provide context from my side. It’s really an exciting period for DRD as we’re building our gold growth story. Every time I look at the results, I can see a little bit more of our purpose being to reverse the environmental legacy of mining. You’ll see it through in the property, plant, and equipment numbers, and in our cash flow, and I’ll emphasize that in the presentation. We do operate while setting up for the future, and Niel provided necessary context on that. A big thank you to the exceptional operational team that runs the business 24 hours a day, 365 days a year. It’s amazing to see how the team reacts to challenges, and that’s become part of the DRD story. As Niel mentioned, we present these results comparing the first 6 months of our financial year with the same period last year. Revenue is up 12%, assisted by a 22% increase in the average rand gold price to ZAR1.173 million per kilogram. Despite tonnages being down, gold sold was 8% lower than the comparable period in 2023. Cash operating costs have continued with double-digit increases due to machine hire and contract reclamation costs, resulting in a period-on-period increase of 12% in costs. After gold inventory adjustments, this leaves us with an operating profit up 29% period-on-period to just over ZAR431 million, which is a solid contribution. It’s important to recognize the significant environmental cleanup during the same period. Solid results have come from our cleanup operations, which look ahead to our sustainable business. The Far West Gold Recoveries site has also seen similar revenue numbers with gold sold down by 8% period-on-period but revenue also up 12%. Cash operating costs look more severe at face value but have specific reasons for the increase. We see an up to 24% increase period-on-period, driven by specific increases in reagent use and spikes in electricity costs, particularly related to Driefontein 3. Niel mentioned the installation of high shear agitators adding to costs but in a beneficial way that will look to release more gold for us. The operating profit saw a moderate increase of 4%, which is still impressive given what the team is accomplishing. Looking at group financial trends, our operating margin retains a healthy 30%, and we’ve seen margins increase in our all-in sustaining costs. The highlight from last six months is the free cash flow generated, which tells an exciting story tied to our growth CapEx. We also have headline earnings per share at ZAR0.68 per share, comparable to the previous year. Moving on to the income statement, revenue follows the trend, up by 12% with the gold price up 22% and gold sold down 8%. Cost of sales increased 11%, leading to a gross profit just over ZAR762 million. Admin costs have increased due to human capital spend and IT expenditures. Income tax was reported, although this wasn’t a high cash paying period for us. Based on the profits we generated, there’s definitely an income tax number. Moving on to the balance sheet, the increase to ZAR4.4 billion is encouraging. However, cash decreased as we’re diligently using our cash for capital expansion related to our solar project. Our efforts have also resulted in an increased current ratio of 3.7. We’ve been maintaining a stable cash generated from operations at ZAR600 million, and finance income has remained strong. We have an excellent projected outlook based on our solar expansion and operational updates. Thank you for your time.

Niel Pretorius, CEO

Thanks, Riaan. Yes, while the past six months have not been as impressive, it appears this was the case for most gold producers. The markets have not been kind to gold stocks, despite the fact that the gold price held up quite nicely. This brings a new dynamic; when the West loses interest in gold due to higher interest rates, there are many institutions and governments outside of that trading block eager to reduce their dollar holdings and accumulate gold. Therefore, the gold price is influenced largely by appetite outside the West while the share price is predominantly determined by market sentiment in the West. This discrepancy could explain the significant disparity between the profits generated by gold companies and their share prices. We still believe there may be opportunities for accumulation in this sector, and we are encouraged despite current market conditions. We continue to emphasize our environmental social governance initiatives, a crucial aspect of our strategy. It’s evident that businesses must prioritize their environmental and social responsibilities to succeed in South Africa, particularly where services are failing. I’m pleased to report we’ve managed to decrease potable water consumption by close to 60% and are on track with our goals for water recycling and reducing our dust emissions. The positive update on our dust emissions reflects our commitment to environmental sustainability. We’re striving for ongoing dialogue with communities to address concerns and foster relationships. The current situation is complex; we wish to ensure these relationships bring progress while solely focusing on ethical engagements. I look forward to keeping you updated on our strategic plans and the way forward for the business. Thank you for the opportunity to share these insights, and I’ll now hand over to Riaan for any final comments.

Riaan Davel, CFO

No, all good. I see there are currently no questions posted.

Niel Pretorius, CEO

Okay, then that must be the quality of the presentation, Riaan. Well done to you and the team. Thank you.

Riaan Davel, CFO

There seems to be one question that has just come through.

Niel Pretorius, CEO

Let’s see. I mentioned in the letter that we will elaborate on that at the end of financial year 2024. We are assessing the situation, and if there is anything to report, it will be around that time. We're excited to investigate wider applications for our methodology going forward.

Riaan Davel, CFO

Yes, please share more details about lodging the appeal proceedings by the community forum.

Niel Pretorius, CEO

What that involved was when a license was issued in 2022 enabling us to start mining, there were commercial demands inspired, not by the community, but by an influencer over that community. An appeal was lodged which suspended the license until the appeal was heard. Fortunately, we have submitted a request to lift the suspension, and the Minister has since lifted it. This means that we now have the license to operate, which has been verified thoroughly.