DRDGOLD looks to relight rocket
David McKay
Posted: Mon, 03 Jan 2005
[miningmx.com] -- FOUR DRDGOLD directors bought nearly a quarter of a million dollars worth of their company’s stock in a fortnight last month amid signs that the company’s famed leverage to the gold price was evaporating. The firm’s executive team, chairman Mark Wellesley-Wood and CEO, Ian Murray, as well as non-executive directors, James Turk and Robert Hume, bought a combined 150,000 DRDGOLD shares worth a total $247,000.
Shares were bought at a price of between $1.78 and $1.61/share. In hindsight, the directors should have perhaps waited as the stock slipped to $1.46/share in late December before regaining about 5% to $1.54/share today (3 January, 2005).
Ilja Graulich, DRDGOLD investor relations manager, said directors might recommence purchases after the expiry of the company’s closed period which prefaces the December quarter results scheduled for later this month. “The company has the authority to buy back shares as well. Nothing is planned at the moment but we’ll leave this option open,” Graulich said.
The fact of the matter, however, is that DRDGOLD hasn’t the leveraged appeal it once possessed. Graulich said there had been “good institutional buying” in the past three months, but metal price and rand/dollar volatility had made investors skittish. “The pressure that Harmony Gold has come under has also had an effect on us,” Graulich said. “Investors ask us how we’re doing at R80,000/kg, but they don’t ask us how we’re doing at $430/oz,” he said.
In other words, all eyes were on the performance of the South African operations rather than DRDGOLD’s offshore mines which are estimated to produce $15m in operating profit per quarter.
It’s for this reason the company is considering dividing the company along geographic lines by separately listing its international assets. Murray told miningmx last year that investors seemed to be valuing the company either on an option pricing model or a cash flow multiple. “Our share of Porgera (a joint venture with Placer Dome in Papua New Guinea) is worth between $140m to $180m which, on a two times net present value, should give us a market capitalisation of more than $300m alone,” Murray said last year. DRDGOLD is currently valued at about $350m. The outcome was that the company’s South African gold resources of some 10m oz, traditionally DRDGOLD’s best quality for US investors, had been given virtually no value by the market.
Victor Flores, an analyst for HSBC, said he had no objection to splitting the company but asked whether it made sense if cash flow from offshore assets was used to cross-subsidise the onshore assets. Ultimately, however, the question was whether South Africa remained “...a permanent value trap,” Flores said. History shows that conditions can change quickly as demonstrated by the recovery in the dollar gold price after it slumped to about $254/oz in the first half of 2000, he said.
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