Earnings Call Transcript - DRD Q2 2021

Daniel Pretorius, CEO

Good morning, everyone, and thank you for joining us for this presentation. We will be reviewing the six months ending December 31, 2020. Alongside me is Riaan Davel, our Chief Financial Officer, and Jaco Schoeman, our Chief Operating Officer. There will be an opportunity for questions at the end of the presentation, and I will direct them to either Jaco or Riaan based on the topic. We will also discuss the impact of COVID-19 on our business and our strategies for managing its challenges. I will highlight what has been working well and the emerging risks that we are considering in our investment planning and strategy. Additionally, I will touch on our relationship with Sibanye-Stillwater and its influence on our strategy. Riaan will then provide the financial results, which have been outstanding, supported by our operations' throughput and recoveries. We are pleased to present these results today. For the group, we experienced a 41% increase in revenue to just under ZAR 3 billion, with our operating profit doubling to just under ZAR 1.5 billion compared to the prior period. Gold production saw a slight decrease to just under 3 tonnes. Our headline earnings reached just under ZAR 950 million for the six months, allowing us to declare a dividend of ZAR 0.40 per share. I will also discuss our substantial cash balance and how it informs our future plans and cash flow management. We recorded a 17% increase in all-in sustaining costs, reflecting our focus on capitalizing the business. An increased investment was made in plant and infrastructure, indicating an acceleration in CapEx to prepare for the future. The average gold price remains strong, at just under ZAR 1 million per kilo, although we recognize this may not last indefinitely, necessitating proactive measures for any future downturns. Our business performance has also allowed us to speed up rehabilitation initiatives, including the rehabilitation of 52.5 hectares of tailings site walls. I encourage you to check our integrated report for visuals of these efforts. It is crucial to manage dust and water containment from tailings, especially since many are located near residential areas. Our total environmental spend over the past six months was just over ZAR 50 million, and we will continue this trend as we believe in concurrent rehabilitation. We are actively engaging in cleanup efforts on several sites and recently recommenced and accelerated rehabilitation activities. Looking at trends from the past 18 months, we saw a slight dip in throughput during the second half of the previous financial year due to the COVID lockdown, but we've since restored volumes at Ergo to above previous levels. Yields have also improved. As mentioned in prior updates, following the lockdown, we were mining lower-grade sites initially, which affected gold recoveries, but these have since been restored. Moving forward, the performance of Knights will begin to wane as it approaches the end of its high-grade life, though it continued to contribute positively for the past six months. Ergo performed exceptionally well in terms of plant stability and throughput, producing 2.2 tonnes of gold for the period. At Far West Gold, trends remained flat, focusing on a single site. We are structuring the business to effectively mine those tonnes. Although there was a slight dip in recoveries, gold production remained robust at over 700 kilos, with strong margins. The prevailing gold price has surpassed our initial forecasts, enabling us to reserve some cash generated for future investments. Sustainable mining requires a balanced approach to resource management, and we're retaining some cash flows to support upcoming CapEx. Consolidating our trends, we are pleased to report an increase in tonnes compared to the last six months, which is essential given the economies of scale that drive our business. We must maintain full mills, and we are happy with our team's ability to achieve increased tonne input into the plant. Production has come close to three tonnes, and considering the circumstances we've faced, the operational results are quite promising, with finances looking very encouraging. Riaan, now I will turn it over to you.

Riaan Davel, CFO

Thank you, Niël. It’s a pleasure to present the financial results, which I am very proud of, and I commend the operational teams for their dedication. Maintaining production continuously throughout the year is much more challenging than it appears. I will focus on the results for the six months ending December 31, 2020, compared to the same period in 2019. As Niël mentioned, our operations have remained stable. We saw a slight increase in gold sold, leading to a significant revenue increase of over ZAR 2.2 billion, a 43% rise, primarily driven by the average rand gold price. Despite facing some tough conditions, we managed to maintain solid gold production. On the cash operating costs, there was a 10% increase year-over-year, with Ergo contributing to a 3% rise due to dealing with tough material that required more reagents and inflationary pressures. However, operating profit increased remarkably by 165% to ZAR 933.8 million, showing robust results from Ergo. For Far West Gold, production slightly decreased, resulting in a reduction of 34 kilograms sold, but revenue still grew by 36% to just under ZAR 700 million due to the rising gold prices. Cash operating costs increased by 14% to over ZAR 200 million, mainly due to full milling operations and a higher winter tariff. Despite the decrease in gold production, Far West Gold maintained a cash operating cost below ZAR 300,000 per kilogram, aligning with our high-grade resource strategy. Overall, the group's operating margin has displayed an impressive trend of nearly 50%, a clear indication of our efficient response to the current operating cost environment. Our all-in sustaining costs are around 40%, which reflects strategic capital expenditure aimed at operational efficiency. We generated free cash flow of just under ZAR 760 million, an 87% increase from the prior period, supported by high gold prices. This also included a substantial tax payment and the settlement of our long-term incentive scheme. Despite these expenditures, we were able to generate strong free cash flow while continuing to plan capital investments for growth in both Ergo and Far West. Headline earnings per share stood at ZAR 1.11 for the six months ending December 31, 2020, an increase of 129% compared to the previous period, with headline earnings just under ZAR 950 million. The revenue rose by 41%, with a minor overall drop in gold sales and a significant increase in average gold prices. In terms of cost of sales, a throughput increase of 3% was observed, alongside inflationary increases in reagents and milling costs. This resulted in a 10% overall rise in costs, yielding a gross profit increase of 125% to just under ZAR 1.3 billion. Although administration expenses and other costs are not the main focus, it’s worth noting that long-term incentive schemes can affect our financials, given the revaluation based on share price fluctuations. The income tax line has increased significantly due to the taxable profits; however, profits for the period reached just under ZAR 950 million, up by 185%. The balance sheet shows healthy growth, with property, plant, and equipment reflecting a combination of capital expenditure and depreciation, while our liabilities remain well-managed. Our cash generated from operations exceeded ZAR 1 billion, a 117% increase from the previous year. We also maintained a robust cash position, reflecting our strong operational performance and strategic initiatives around environmental rehabilitation payments. Lastly, I am pleased to declare a dividend of ZAR 0.40 per share, marking the 14th consecutive year of dividends for DRD. Additionally, our share price has seen significant appreciation in recent months, reflecting our positive performance trends. Overall, we've achieved a strong total shareholder return. Now, I will hand it back to Niël.

Daniel Pretorius, CEO

Thank you, Riaan. The ESG theme has undeniably become an important investment focus both domestically and globally. Our company has prioritized sustainable development for over a decade, generating value in multiple dimensions and actively seeking social and environmental benefits. Alongside this, we've consistently paid dividends for 14 years. This year, due to favorable gold prices, we've allocated significant resources toward sustainability efforts. We invested nearly ZAR 52 million in rehabilitation, responding to changing standards in mining, especially in urban areas. It’s essential for us to enhance the quality of life for communities near our operations, and we believe that all mines should commit to restoring their environmental footprint. We rehabilitated 52 hectares of tailings by introducing vegetative cover, particularly in the Crown Tailings area, where we've facilitated natural vegetation growth through irrigation. Unfortunately, wildfires during winter pose challenges, and we are working to educate our communities to prevent such occurrences. Additionally, we've engaged with the Nuclear Regulator to release almost 27 hectares of land for sustainable use, ensuring it does not become a new problem, such as illegal mining or dumping. We aim for the cleared land to be used constructively for the benefit of surrounding communities. We also serve as a conduit for information between the communities and city councils, helping optimize land use. Regarding governance, particularly around tailings management—which has become increasingly critical—we have taken steps to ensure transparency and independent oversight under our Tailings Review Board, established in 2018. They meet quarterly, providing high-quality assessments and recommendations that strengthen our governance regarding tailings safety and management. In the past, we heavily relied on service providers for oversight, but we are now implementing internal management protocols, ensuring proper reporting to our Executive Committee and Board. We're satisfied with how this system has been managed, with consistent updates on tailings status through enhanced monitoring technologies, including drone surveillance and satellite imaging. The impact of lockdowns on our surrounding communities has been significant. Our Broad-based Livelihoods Programme has developed a strong network within these communities, which we've leveraged to provide relief during these tough times. Alongside our usual social investments, we contributed to the Solidarity Fund and initiated the Impophomo program for ongoing distribution of relief packages. Going forward, it’s vital to establish resilient systems in our communities that will persist beyond the mine's operation, empowering individuals through knowledge. We're excited to deepen our research collaboration with the University of Pretoria, focusing on understanding and mobilizing the informal economy to support sustainable community development. As for COVID-19, we continue to maintain strict health protocols established during the initial outbreak. We've conducted 237 tests by the end of December, successfully keeping infections relatively low, thanks to our dedicated staff who prioritized adhering to hygiene and distancing measures. Looking ahead, COVID allowed us to reflect on aspects that propelled our business's success in recent years. While we don’t envision complete automation, we emphasize equipping trained personnel with advanced tools to enhance productivity. We've also implemented measures to address weather-related challenges, ensuring efficient water separation on reclamation sites. However, a pressing concern is the ongoing issue of affordable electricity supply, which could jeopardize our embedded resilience, necessitating immediate strategic planning. We intend to explore solutions, including power storage and renewable energy sources like solar, to mitigate costs and enhance our operations' sustainability. Social risks remain pivotal on our radar, given the stark levels of hardship in our communities. It is crucial for industry and businesses with capital access to engage and invest in sustainable programs to address these challenges, as social unrest looms if conditions remain dire. Moreover, the political environment is increasingly important for our capital investment decisions. We're aware of substantial capital projects awaiting a conducive investment climate in South Africa. We need to scrutinize regulatory certainty and transformation policies, ensuring that empowerment efforts effectively reach the intended communities. We’re committed to advancing our infrastructure projects while aligning our operations with Sibanye-Stillwater’s strategy. Together, we see significant opportunities for growth, which requires a thoughtful approach to seize them wisely. In summary, we believe we are aligning with our guidance and are pleased with the financial performance of our business, which has been robust due to its operational efficiency. We've reserved a significant portion of our cash for development projects, especially in the context of the Far West Gold opportunity, ensuring we maintain exposure to gold price fluctuations without locking in prices unnecessarily. This approach offers promising investment prospects, and we remain focused on sustaining this model. Thank you for your attention, and we are open to your questions.

Wilhelm Schoeman, Analyst

We have a question from Ed Stoddard from Business Maverick. He mentioned that you did a commendable job rehabilitating the dams and tailings extension, and you are generating revenue by addressing environmental issues that are often overlooked in the industry. Have you considered expanding your expertise to other areas? You've established operations in Australia, Ghana, and Chile. Is that something you are contemplating?

Daniel Pretorius, CEO

Yes, we periodically evaluate our operations. Currently, there’s nothing significant to report, but we remain open to opportunities. We believe that collaborating with Sibanye-Stillwater could provide an avenue for operations beyond South Africa. Additionally, we are focused on developing a comprehensive tailings management solution that addresses the entire lifecycle of tailings. Often, mines postpone rehabilitation until the end of their operational life, which has led to inadequate environmental mitigation. We anticipate that this model will face increased scrutiny, and companies will need to show progress in rehabilitation concurrent with mining activities. We see potential for our involvement in tailings management, possibly offering our services in this area.

Wilhelm Schoeman, Analyst

Could you provide more insight into your growth expectations for the next 6 to 12 months? Additionally, regarding the increase in mining and milling costs, is that a one-time expense?

Daniel Pretorius, CEO

Let me address the milling first. This is not a one-time issue. Milling has now become an integral part of the circuit at Far West Gold, so that will continue. The increased winter tariffs are cyclical and only occur during that period. Since these mills operate on electricity, I heard there may be plans to phase out those higher tariffs. Hopefully, we will eventually see the end of this issue, which has been a concern for many years. As for changes in the milling circuit, this isn't complete yet, but it will be finished once we establish a closed milling circuit, leading to better efficiencies. Regarding our growth profile, what you're observing now is pretty much it. We do not expect much change over the next six months, and we'll reassess our guidance at the end of the financial year. If there are any significant developments, we will provide an update regarding upgrades. That's all I have to add.

Wilhelm Schoeman, Analyst

No, that looks like it. I feel we have nothing further.

Daniel Pretorius, CEO

Thank you to all of our shareholders for your support over the last year. We hope to be worthy of that support and deliver the performance you deserve to justify it and reward you for trusting us with your investments in our company's shares. Thank you very much for joining us and for listening to this presentation.