Posted: 2000/08/2 09:00 PM GMT+2
Mike Prinsloo: MD, Durban Deep
m1.mny.co.za
MONEYWEB: Tonight's profit-reporting section kicks off with gold miner Durban Deep. It's a company for which just about everything that could have gone wrong in the past year, did. But, it looks like things might be turning around. Moneyweb's mining specialist, David McKay, has been doing some homework. David?
DAVID McKAY: Alec, the company seems to have developed a new focus from today, presenting a new face and a new impetus, if you like. New chairman Mark Wellesley-Wood has taken up the full time position, and also made a number of crucial management changes in key positions. The company also dedicated itself to a fresh approach to corporate governance and of course it was linked, and the controversy - we saw Brett Kebble resign from the boards of Western Areas and Randfontein. The company also said it is after new acquisitions as well, and put itself in the market for possible mines that Anglogold or Gold Fields might want to sell off. We haven't heard that before. We have heard before its appetite for mines in Australasia, and that's still on the agenda. Finally a restructuring of the hedge book for DRD, as it seeks to gain greater exposure to the spot gold price. But the very key of this new impetus, if you like, is to generate free cash flow, and the group says its phase of ploughing capex back into its own mines is coming to an end. It expects to build up its balance sheet and to acquire new mines and even, it was suggested to me, pay dividends or buy back shares to mop up some of that market weakness.
MONEYWEB: David McKay, with a very interesting background, and Mike Prinsloo, the MD of Durban Deep is in the studio. Perhaps we could start off with the first issue there, what David was saying about corporate governance. Are you happy now that the "Kebblegate", if you want to call it that, which was to do with Durban Deep wanting to get together on a joint venture with Randfontein, Harmony then making a hostile takeover bid for Randfontein, all kinds of funny things that went on there - are you happy that's behind you?
MIKE PRINSLOO: Yes, Alec, I think we've come through a difficult six months on that issue and it's behind us. We've had Deloitte & Touche do full corporate governance checks on us, and they've made certain recommendations to secure us into the future, and we'll use them to follow up on the implementation.
MONEYWEB: Do you know, Mike, when people look at Durban Deep - and you've got a huge fan in Catapult Clive Roffey who says you're the cheapest, the best stock on the JSE today - they say, "But when last did you make a profit?"
MIKE PRINSLOO: I think one has to put it in context. Durban Deep has always been a marginal mine, and it has been based in Johannesburg itself, on the Main Reef Road. What's happened to Durban Deep over the last three years is we've grown it from a 60'000-ounce producer to now 1.1m-ounce producer, with the acquisition of mines like Hartebeestfontein, and Blyvooruitzicht, and the new capital project that Blyvoor, which is called the Blyvoor 2000 Project, has now come into effect - and those mines now have lives in excess of eight and ten years respectively, and at higher grades of 8 and 9 grams a ton. So it's an opportunity for Durban Deep and what we've done in the last six months is to close down the loss-makers.
MONEYWEB: Perhaps if we can dwell a little on that, Mike. Harties is a well-known name amongst people who follow gold shares in South Africa. Blyvoor is also, Buffels also, these are all part of the Durban Deep stable, but how have you managed to get such high grades, or such high grams per ton? In the old days, with 8 or 9 grams per ton you were talking about a very rich mine?
MIKE PRINSLOO: Yes, but mainly through injecting capital into those mines and rejuvenating them for the future, and that's what we've done. Over the last three years we've stuck in excess of R300m into those mines, and that's basically the reason why we've never generated free cash, as we've taken everything we've made and rejuvenated the mines. And now we're looking forward to an 8- to 10-year life with a lot of free cash coming through.
MONEYWEB: All right, so let's just get this absolutely right. You've gone in, you've bought certain assets, you've fixed them up, you've spent the money, and now you're ready for payback?
MIKE PRINSLOO: That's right.
MONEYWEB: The cost per ounce - you talk about a marginal gold mine, being Durban Deep, with your costs very high. You've managed to bring those back again in the most recent quarter - where are you targeting?
MIKE PRINSLOO: We've brought them down from $380 an ounce, right down to $240, we broke $240 this quarter and we're targeting $230 in the next quarter, we hope with the Blyvoor 2000 Project coming through to average the group's cost at $220 an ounce.
MONEYWEB: And what will that mean to your bottom line? When will shareholders start seeing this cash pumping through?
MIKE PRINSLOO: Well I think they'll start seeing it from this coming quarter, this September quarter, and as Blyvoor 2000 doubles its production over the next 14-18 months we'll get the cash flows coming through strongly.
MONEYWEB: How much per share, when you do finally report that profit? How much will it be?
MIKE PRINSLOO: On the existing share price, probably about 15%.
MONEYWEB: Per quarter?
MIKE PRINSLOO: No, per year.
MONEYWEB: Per year, so you're looking at about a share price of R6, R1.50 somewhere round there, a year, that you can produce?
MIKE PRINSLOO: That's right.
MONEYWEB: What happened in Australia in the past three months? You've made investments over there, the Hargraves mine I see you have now closed because of flooding.
MIKE PRINSLOO: Yes, and we've written it off in this quarter. The write-off has been in excess of R59m. For the quarter, The Dome asset has come into the Durban group and we've consolidated that. That produced a cash operating profit of R10.7m, and we spent R6.9m in capital at the mine, and that should come through strong on cost. The cash operating cost for the quarter at Dome or the Tolukuma mine was R43'000 a kilogram.
MONEYWEB: Has Hargraves been a big disaster for you?
MIKE PRINSLOO: Oh, it was a big knock. It was like a knock-out punch for us. It was our first operating asset in Australia and we only owned it for two days when we had that major influx of water, and we've had to write off in excess of R100m in the last two quarters on it. So yes, we lost a producing asset and we had to write off R100m. We've now got our first producing asset in the Australasian region - and that's what David mentioned. We would look at a second leg to the Australasian production machine, just to stabilise that, and we've got opportunities that we are looking at there.
MONEYWEB: With all this money that you've spent, going into Australasia, the R300m that you've put into the various mines, and assets that you've acquired, how much cash, or how much debt do you have?
MIKE PRINSLOO: Well our debt/equity ratio after the write-offs were done, we wrote off in excess of R400m, is 33% which is high. We don't want it that high, we'd like to see it at 20%, but it's not out of kilter with other mining groups at this gold price.
MONEYWEB: So are you going to first of all wipe out that debt before you start paying dividends?
MIKE PRINSLOO: Well, what we want to do is strengthen the balance sheet. We've got those debt structures well structured for the future, and if the cash flows come through strongly and we get any assistance from price, then we'll pay dividends earlier.
MONEYWEB: But surely the issue, really, when you look at it - and we've spoken about a whole lot of events and the operational side is not even 50% of a stock like Durban Deep - you've got to look at the gold price. What is your gut feel at the moment?
MIKE PRINSLOO: Well I think the gold price has hovered down at these sort of ultra-low levels for that long that something has to happen. And we saw in September last year the elastic almost stretched to $340, and it's back down to $277. We believe that the gold price will move through $300 in the near future, and sort of sit around $310/320, and that will make Durban Deep a very strong company.
MONEYWEB: What gives you that confidence?
MIKE PRINSLOO: I think we've listed on seven stock exchanges across the world. We're in daily contact with people from all over. We're linked to all the big banks in terms of our hedging book, and I think you're getting that current - whereas, in the past, the view was it was just negative, negative, negative all the time. You're now starting to get some reports through pretty strongly that there is a move. I think it's only the strength of the American dollar that is really holding the gold price down at the moment.
MONEYWEB: And that's part of the reason, as David mentioned earlier, why you have restructured your hedges. In other words, you can now take full advantage of any gold price upmove?
MIKE PRINSLOO: Yes, well we've always had to protect the capital programmes and the marginal ounces. The fact that we've now closed down the loss-makers, we're in a position to make cash, and the rand has weakened to the point that I don't believe we have to hedge any further ounces, and we've closed out 2m ounces over the last nine months - we've got 1m ounces left, of which I think we'll just deliver as fast as we can and get ourselves into a position that we're free if there is a rally.
MONEYWEB: Every $10 improvement in the gold price, what does that mean to your bottom line?
MIKE PRINSLOO: It brings in about R15m per month.
MONEYWEB: Wow - if you are a gold bug, if you believe that Clive Roffey has got it right, this is one that you've got to look at very seriously. Mike Prinsloo, the MD of Durban Roodepoort Deep, and it is a company that, as he was saying, has done all its homework, is now ready, and the rebound should be coming.
By: Alec Hogg |
