moneyweb.co.za
Wednesday 18 August 1999
DRD becomes millionaire gold producer
by David McKay
The acquisition of Hartebeestfontein stands to triple DRD's share earnings
THE purchase of Avgold's Hartebeestfontein by Durban Roodepoort Deep (DRD) will enable DRD to lower overall costs and possibly close the expensive underground section of Buffelsfontein, the North
West province operation with which Hartebeestfontein is to be merged. Buffelsfontein reported costs of about R63 000/kg at its underground sections and R55 310/kg overall. In comparison, Hartebeestfontein reported per kilogram costs of R52 260, and gold production of 486 000 ounces. This gives DRD total gold output of 1,1-million ounces a year thus giving the group access to the so-called millionaires club which also includes Anglogold, Gold Fields and Harmony.
Analysts are generally positive about Avgold's sale of Hartebeestfontein to DRD, a transaction effective from August 16 at a cost of R45m. They believe DRD has the no-frills style to gold mining which could unlock value in Hartebeestfontein which was always struggling to maintain profits in the Avgold group. Merrill Lynch gold analyst David Hall says if DRD is able to lower costs R4 000 per kilogram, the life of mine of Hartebeestfontein could be extended from Avgold's forecast of five years to possibly ten years. At any rate, DRD's earnings are forecast to improve to 41c a share from 13c a share as a result of the deal. Ultimately, however, the gold price would ultimately decide if this was a good deal, he says.
BoE Securities gold analyst Piet Stoltz says the transaction gives DRD critical mass and will add value to its production, increasing volumes to help lower costs at Buffelsfontein and yielding a number
of synergies. However, if there are areas where Buffelsfontein and Hartebeestfontein are matched, there will also be duplications. MD of DRD, Mike Prinsloo said in a statement on Monday that the group will
focus on the rationalisation of the administration, services, metallurgical plant and other surface infrastructure at Buffelsfontein and Hartebeestfontein.
Another possibility is that the Buffelsfontein underground section could be closed. However, a degree of cash has already been spent opening up areas of Buffelsfontein, and it is likely DRD will attempt to rein in Buffelsfontein's costs through the merger with Hartebeestfontein before taking any further decisions.
Capital expenditure will also be refocused. Prinsloo also believes DRD can improve the mining culture at the new mine: "Through our considerable experience in mining the Vaal Reef at Buffels we have
gained a valuable insight into the nature of the mining activities at the contiguous Harties," he said.
Durban Roodepoort Deep is also looking at buying into Indonesian gold mine Rawas DRD also announced that it was in negotiations to buy Rawas, a gold mine in Indonesia producing about 100 000 ounces of gold a year with reserves and resources of 535 000 ounces. The mine is
small but covers a vast tenement with "good exploration potential", the group says. "Exploration targets are indicating that the existing Rawas resource base could be considerably expanded,"
Prinsloo said.
DRD has already dipped heavily into cash resources to pay for control of Hartebeestfontein (cash of R45m over the next six months) leaving its own cash pile at a somewhat precarious level of R26m. As
a result, the group does not have much additional funding for new acquisitions. However, the proposed purchase of Rawas will be through the issue of about 8,2-million shares.
Analysts said they did not know much about Rawas, but that it must be a valuable mine because DRD is prepared to issue almost an eighth of its entire share capital. They reserved judgement however until
more was known about costs at the mine. In the meantime, DRD said the offer document to acquire 100% of Hargraves, to be issued to the Australian mines' shareholders, was sent to the Australian
Securities Investment Commission on August 13. The offer to buy Hargraves is part of a push by DRD to source up to 400 000 ounces from Australasia. The offer to purchase Rawas is in line with this aim.
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