The Browns Creek fiasco may go a long way in explaining why DROOY is so depressed of late, IMO:
egoli.com.au
DRD looks to boost output to 1.9Moz
The world's seventh biggest producer of gold, Durban Roodepoort Deep, is aggressively expanding its Australasian business arm.
The past two years have been anything but dull for Durban Roodepoort Deep. The South African-based gold miner with global designs has had a rollercoaster ride of corporate activity in that time.
One of the first in the latest wave of South African majors to journey east, DRD's tangles with Australia have not been without drama (the Emperor Mines and Browns Creek sagas cases in point), however, despite these setbacks DRD appears likely to end 2000 in great shape.
At press time DRD had announced it would acquire Consolidated African Mines' 28% shareholding in Randgold & Exploration company and 64% of JCI Gold in a share and option deal. Details were thin but the deals were seen as a major step towards the ultimate consolidation of South African miners JCI Gold, CAM, DRD, Randgold & Exploration and Randgold Resources. The acquisition stands to lift DRD's production profile to 1.9 million oz per annum and it's exposure to the spot gold price.
This is good news for a company that already has more than $30 million in the bank - and with its latest Australasian acquisition, Dome Resources, about to be bedded down, DRD scrip could be regarded as cheap at $2.10 (press time price) if you're a gold bull who believes the precious yellow metal will regain its lustre.
Certainly that's what some US investors think. DRD's 105-year corporate history coupled with its leverage to the gold price have made it a sweetheart with American retail investors. Almost daily more than one million of its 109.5 million shares on issue are traded on the NASDAQ stock exchange.
To understand DRD it's important to have a feel for its existing South African operations, which remain the heart of its business. DRD's gold business is essentially an agglomeration of assets spread along the Witwatersrand Basin - South Africa's gold heartland.
In the past four years the company has built up a portfolio of assets that give it the size and critical mass to attract corporate attention. DRD now boasts projects in the following locations: Blyvoor, buffels, Durbank Deep, West Wits and at Crown, the latter primarily being a large tailings re-treatment operation. This portfolio was bolstered in October last year when the company purchased the Hartebeestfontein or "Harties" mine which represented a 38% increase in gold output to the current combined 1.2Mozpa level.
These old and often deep shafts have not been without their headaches for management. Declining grades and ongoing infrastructure maintenance costs have continued to bleed funds, despite the relative cheap costs of labour in South Africa.
DRD consequently bit the bullet in March this year when it announced the No.7 and Circular shafts at the Durban Deep precinct located immediately west of Johannesburg would be mothballed. The shafts had become uneconomic due to mounting dewatering costs and the passing of a joint venture opportunity with eh owners of the nearby Randfontein operations.
According to DRD's chief financial offer, Charles Mostert, the closure will help DRD with its old bugbear of costs. In the past year the management has done an excellent job of driving down the group's average cash costs to $US 255/oz. According to Mostert, cash costs should be further reduced to $US230/oz in six months once strategic changes take effect. DRD's ore feed position is not in question - its overall resource position stands at a staggering 84Moz including 15Moz in reserves.
Mostert said after the two shafts are shut DRD should be yielding about $7 million in cashflow per quarter at the current gold price. He added DRD could bring on stream additional ounces and lock them away through a hedging program, but the company is loath to do this in the current depressed market and is mindful not to upset its unique US investor support base.
"DRD does have a brand name," Mostert said. "There is a ready market in the US for our paper and we're obviously aware of that. To date in SA we've concentrated on cutting the fat out of our operations. While there's been little mining changes in a technical sense, we've dealt with labour issue (DRD employs 20,000 workers including about 8000 contractors) and decentralised our administration structures - all legacies of the old way of mining in SA."
Meanwhile, DRD has set up office in Perth, Western Australia, to run its Australasian push. From there it will manage its Hargraves Resources and Dome Resources assets. The $50 million takeover of Hargraves and, more precisely, the subsequent flooding of the Brown Creek mine in New South Wales has been the subject of much teeth sucking for DRD. Mosert says the company had even reviewed whether it should proceed with its push into Australasia.
"There was certainly a lot of soul searching in terms of deciding what was best for shareholders but we came to the decision that there are still a lot of good assets in this region and places like Papua New Guinea hold no fears for us," Mosert said.
DRD is currently trying to salvage its Hargraves position. The Ivory Coast exploration assets held by subsidiary company DMR (where a 1Moz resource has been delineated) is for sale for an asking price of $10 million. The sale package includes the Burton coal mine royalty which is worth $2.5 million per annum and is scheduled to run for 13 years.
At Browns Creek the underground mine is flooded to surface. It is understood preparations were being made to dewater down to the 385 level in order to access a pillar (with a two-year life) containing about 140,000oz. In the meantime, exploration has been accelerated at the nearby Ferndale tenements which sit along strike from Newcrest Mining's Cadia East and Ridgeway deposits. Previous owners already pumped $13 million into the Ferndale ground.
Mostert scoffed at suggestions that the hitting of the water aquifer at Browns Creek was caused by the change of mine ownership. "The change in management did not affect the result; there was in fact no change to the mining crew. It was a total surprise to everyone," he said. "All the guys know is that when they blasted, not long after, there was a second blast. All we can assume is that the hanging wall collapsed.
"The market has been understanding. We've had calls from people saying, 'bad luck chaps that's mining'. More importantly the industry as a whole was grateful there was no loss of life."
Mostert said had Browns Creek performed as expected (about 70,000ozpa) then DRD would have entered a period of consolidation. Instead the flooding has served as a driver for further investments, the biggest of which is the $50 million takeover dib for Dome. At press time DRD had secured 70% of the stock. DRD is offering one of its shares and 80c for every nine Domes shares held.
Dome is producing gold at the annualised rate of about 80,000ozpa, but Mostert believes DRD can push the production rate up to 100,000ozpa.
DRD's penchant for acquiring production assets around the 100,000ozpa mark is governed by its corporate strategy to become a 400,000opa Australasian producer in the next few years. Given the company's rapid rise in this region during the past 24 months, that goal no longer sounds as fanciful as it may have in the recent past.
By James Hamilton. |
